uS Debt Ceiling Talks Move in Wrong Direction;

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US Debt Ceiling Talks Move in Wrong Direction; Weighs on Sentiment

Content by DailyFX | Published on July 25, 2011 at 7:14 am

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* US debt ceiling talks move in wrong direction

* Eurozone bailout implementation to be challenging task

* Franc and Yen find renewed bids in early Monday trade

* Commodity bloc currencies could be exposed

* Monday economic calendar very light

We would expect that markets could once again come under pressure in the new week, with US government negotiations on the debt ceiling seemingly moving in the wrong direction and Eurozone implementation of the latest bailout plan not viewed as a simple process. The announcement into the weekend from President Obama that the Republicans had cut off negotiations on debt ceiling talks has certainly weighed on sentiment in early Asia trade, and many now fear that the government will let the unthinkable happen and fail to raise the debt ceiling by the deadline.

This of course would open the door to a downgrade of US credit ratings and potentially have a devastating impact on the global markets. US government officials had hoped that things could get back on track ahead of Monday’s Asia open, but these efforts could not be materialized. Pimco’s El-Erian has not helped matters after coming out on the wires warning that the US may lose its AAA debt rating even if lawmakers reach a last minute plan to avoid a default.

As a result, we have seen the non-USD safe haven currencies well bid early on, with the Franc and Yen standing out as the prime beneficiaries. Commodity currencies have been very well bid and immune for the most part to hiccups in the global economy, but we fear that this trend could soon be at an end and would watch for underperformance in Aussie, Kiwi and Cad should sentiment remain weighed down on Monday.

On the data front, Aussie producer prices came in as expected, while UK house prices continued to decline according to the latest Hometrack survey. Looking ahead, the economic calendar is extremely light on Monday and we would expect to see markets trade off of the broader global macro themes mentioned above. Investors will pay close attention to any new updates relating to the debt ceiling, while also watching to see if the Eurozone plan can in fact be implemented. US equity futures and oil prices are tracking lower, while gold continues to remain very well bid in the current market environment.

ECONOMIC CALENDAR

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