Fitch Outlook Remains Negative
Ahead of an impending debate over the US’s $16.4 trillion debt ceiling, Fitch Ratings issued a renewed warning to the US economy. Announcing that the agency anticipates the debt ceiling to be raised in the coming months, it warned that “failure to raise the debt ceiling in a timely manner” would prompt a review of the current US credit rating – which remains at AAA. Both Fitch and Moody’s ratings agencies still rank the world’s largest economy AAA, while S&P rates the US economy a notch lower at AA+.
Failure to handle the impending debate in a timely manner would force the Treasury to “immediately eliminate the deficit” which could cause economic contraction “twice as great as the recently avoided ‘fiscal cliff’”.
A ratings downgrade would be bearish for the US economy, as it would be the second ratings cut in the last two years – setting the country up for a review with the Moody’s. Any further downgrade would place into question the safety of US based assets, bearish for the US dollar.
Spanish Debt Auction Positive
The rather bearish news overshadowed more upbeat results from the most recent short term bill sale by the Spanish Treasury. In the second offering in as many weeks, the Treasury was able to garner 5.7 billion euros in borrowing following the auction of 12 and 18 month securities. The figure was above the maximum target of 5.5 billion euros and is reflective of supported demand for Spanish debt.
Subsequently, average yields moved lower yet again, with the 12 month bill showing a yield of 1.47% - down from 2.67% in a previously held offering. Eighteen month bonds fell to an average yield of 1.69% from 2.78%.
Declining debt costs remain bullish for the Euro as it supports the likelihood that Spain won’t be required to officially request a bailout – and is reflective of falling concerns over the region’s near term prospects.
Unfortunately, further downside is likely on the current EURUSD setup. A close below the 1.3335 figure, yesterday’s session low, could open up a decline to 1.3240 support in the near term.
Source: FXTrek Intellicharts