Forex Go!

– Debt crises and political high jinks on both sides of the Atlantic panicked investors worldwide this week. In Europe, jitters about Italy’s fiscal position grew on Monday and Tuesday ahead of key bond sales and parliamentary votes on the 2012 austerity plan. Meanwhile, European officials were rumored to be ready to just let Greece go bankrupt after ratings agencies said that any rollover of the nation’s debt would put it in selective default. By Tuesday morning, yields on Italian and Spanish ten-year debt had risen above 6.0%, hitting highs last seen during the Asian financial crisis in the late 1990s. Tension eased somewhat in Europe after Italy successfully sold debt and passed the austerity measures, ceding the limelight to Washington, where the debt ceiling farce entered act two. Over the weekend it had looked as if the White House and the Congressional GOP leadership were ready to commit to the terms of a ‘Grand Bargain’ on the debt ceiling, including more than $4T in spending cuts and some amount of revenue increases (aka tax hikes). But by Tuesday this deal appeared to be moot as partisans on both sides hardened their positions; conservatives refused to sign on to any agreement that would raise taxes or remove tax breaks, and liberals vowed to refuse any reductions in entitlement programs. There were further melodramatic twists and turns in the debate, but as of Friday afternoon both sides had essentially retreated from compromise. S&P put the AAA rating of the United States on negative watch, warning that there was now at least a one-in-two chance it could lower the long-term ratings within 90 days even if the debt ceiling is increased. The ratings agency also warned US lawmakers privately that it would cut the US sovereign ratings if the Treasury was forced to prioritize payments. Traders read deeply into the FOMC minutes released on Tuesday, with some concluding that the Fed was preparing to launch QE3 at any moment (a more nuanced view saw the minutes as basically repeating the Fed’s prior statements that it stands ready to aid the recovery, if needed). At his Congressional testimony the next day, Fed Chairman Bernanke went to great lengths to dump cold water on any belief that QE3 was under consideration, reiterating that further quantitative easing might not be effective in coping with economic problems. For the week the S&P fell 2%, the Dow declined 1.4% while the NASDAQ swooned 2.4%.
  
Great Calls From This Week

Forex:

1) 07/12 04:04ET   USD/JPY: *USD MOVES BELOW THE INITIAL G7 INTERVENTION LEVEL FROM MARCH OF 79.50; Pair at 4-month low

2) 07/14 01:34ET   USD/JPY: JPY broadly weakens against the major pairs; no confirmation of potential FX intervention

– Follow Up: A US bank was cited selling the JPY against the USD and Euro pairs; prompting concerns of intervention

Result: TTN noted that the 79.50 level was ‘pivotal’ in the USD/JPY but a break below would increase jitters for possible FX intervention.

The second headline was noted that it was unlikely any intervention given the price action since mid-March
 
 
Hear It Live Next Week

Monday: May TIC flows, July NAHB; IBM and WYNN earnings

Tuesday: June Housing Starts, FOMC discount rate minutes, House Vote on deficit and debt ceiling; Fed’s Hoenig, BAC and GS earnings, AAPL and YHOO earnings

Wednesday: June Existing Home sales, Fed’s Sack, INTC and QCOM earnings

Thursday: Philly Fed, Fed’s Evans, EMU Summit, MS, AT&T, AMD, SNDK, MSFT earnings

Friday: CAT, GE, MCD, VZ earnings

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