Daily Report: Dollar Rose on Risk Aversion as Debt Reduction Committee Formally Failed

Risk markets were sold off deeply overnight as investors were prepared for the failure of the US debt reduction super committee. And that was realized after formal announcement after US market closed. In a statement, the panel’s leaders noted that "it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline." The special committee was created in August to lay down the plan for at least $1.2T deficit cuts over 10 years and the failure would trigger $1.2T of automatic spending cuts, which fall evenly on military and domestic government programs beginning in 2013. DOW dropped to as low as 11454 before closing at 11547, down -2.11%. Asian followed and were broadly lower. Dollar index was mildly higher on risk aversion and is staying firm above 78 level so far. Australian dollar is hardest hit this week on risk aversion and is currently down over -1.5% against dollar and -1.3% against yen.

In response to the super committee's failure, S&P and Moody's affirmed that US's credit rating is unchanged. S&P, which downgraded US's long term Treasury ratings by one notch in August, said there is no plan for a further downgrade based on the failure and the present rating is already based on the expectation that automatic cuts will take in effect in 2013. Moody's, which put US on negative outlook in August said the outcome was "informative for the rating analysis but not decisive" for a downgrade.

In Europe, EC head Barroso reiterated that the commission will continue to put forward the ideas of Eurobond. He emphasized again that it's an effective way to tackle the current financial crisis. It's believed that barroso will present a study on Wednesday that shows the idea of replacing national bonds with one jointly-backed bond. Germany is known to be opposing such idea but Chancellor Merkel will meet with French President Sarkozy and Italian Prime Minister Monti laster this week to discuss the Eurobond idea.

According to PBoC data published yesterday, China's foreign exchange purchases fell in October for the first time since December 2007. The central bank and financial institutions sold a net CNY 24.9b of foreign currencies, comparing net purchase of CNY 247.3b of net purchase in September. The data showed less liquidity in the interbank market as anticipated by some analysts and raises the chance of a reserve-ratio cut by the end of the year. 12-month NDF of CNY fell by most since October,

On the data front, Swiss trade balance, UK public sector net borrowing, Canadian retail sales, US GDP revision and Eurozone consumer confidence will be released. Fed will also release FOMC minutes.

DOW's sharp decline over night and break of 38.2% retracement of 10404.49 to 12284.31 at 11566.21 suggests that whole rebound fro 10404.49 is finished. Near term outlook is turned bearish and even if price actions from 12284.31 are corrective, more downside is now favored to 61.8% retracement at 11122 and below. A break of this week's high of 11854.81 minor resistance is now needed to signal bottoming. And deeper fall in stocks would likely support stronger rally in dollar and could push the dollar index further towards 79.84 resistance in near term.