The US congress postponed its vote on the Republican plan to raise the national debt ceiling without giving a date for when it will actually occur.  Equity markets and risk assets dropped heavily on the news as this only increases the level of uncertainty that is currently being seen.  In Asian trading, the EUR/USD range was seen at 1.4280-1.4360 with the USD/JPY trading lower at 77.40-77.90.  Congressional Republicans have scheduled a Friday meeting for 15: 00 GMT, so at the very least markets are operating on the assumption that we will not be seeing a vote before then.

The actual vote, however, is unlikely to bring any immediately stabilizing effects, as the Democrat-dominated Senate has made it clear that the Republican plan will not pass their vote.  In macro data, US jobless claims dropped to 398,000 and Pending Home Sales rose 2.4% on a monthly basis (estimates were for a drop of -2.0%).

The numbers are mildly encouraging, so what this tells us is that even in light of the massively negative headlines that are taking most of the focus, the effects have yet to make their way into the economic data.  Market attention will continue to center on the debt ceiling debate, but there will be some macro data as well, with US GDP figures expected to rise 2.0% on a quarterly basis. Chicago PMI is also scheduled for today.

Moody’s placed the Spanish credit rating on review, as the current rating of Aa2 could be downgraded later.  Moody’s main argument for this was that government financing is showing new weakness and the rise in borrowing costs for treasuries could remain elevated.  German unemployment data for the month of July dropped by 11,000, which was less than estimates of -15,000.  The unemployment rate remained steady at 7.0%.

In Japan, we are continuing to see comments from the Finance Minister (Noda), which is suggestive of an increased worry over the value of the Yen.  The price extremes that being seen now will have negative effects on export companies at a time when the nation is still struggling to rebuild its infrastructure in many major cities.  BoJ members have been hinting at currency intervention but the market has yet to find any credibility in the comments as USD/JPY continues to grind lower.  At this stage, it would not be surprising at all to see the central bank start selling Yen but there is little evidence to suggest that these actions would have any significant effects over the longer term.

Technicals:

The GBP/JPY is continuing its downtrend on the weekly charts, with prices currently pressuring support at 126.35.  Daily charts are now showing a well-formed downtrend channel so any rallies are expected to be met with strong selling pressure.  First resistance (sell zone) comes in at 128.30, followed by 130.15.  This latter level also coincides with Fib resistance so any break above here will take pressure off of the downside for the short term.  We are currently targeting new lows below 122.40 in the coming weeks.

The Reserve Bank of New Zealand held its policy meeting yesterday and elected to keep its cash rate unchanged at 2.5% (in line with expectations) but the accompanying statement hinted at the possibility that a rate hike could be seen in the near future.  This was the main market moving event during an otherwise quiet Asian session.

In the US, the President and Congress have yet to reach an agreement to raise the country’s debt ceiling and as the deadline draws closer, there is still no obvious indication for which side has the advantage.  The Republican proposal being pushed by the House Speaker (Boehner) is probably less likely at this stage, as the President has said that he would use his veto authority to stop it from happening.

Market uncertainty is being reflected in equity markets, as the S & P 500 dropped 2% and Asian markets have followed its lead lower.  Macro data yesterday came in the form of the Federal Reserve’s Beige Book, which showed declines in 8 of the 12 geographical areas.  The EUR/USD closed lower on the day, trading at 1.4335-1.4380 while the USD/JPY was relatively stable at 77.70-78.20.

German CPI in July rose to +2.4% on a yearly basis, which matched market estimates.  The Inflation outlook and the expectations for short-term rates have dropped in the last month, with the markets clearly showing more concern for growth prospects.  Friday, we will see the Eurozone CPI figure to get a sense of the wider trends at work in the EU.

In Japan, Reuters quoted finance officials as saying that intervention in the currency markets (generally thought to be in the value of 1-2 trillion Yen) would be a difficult prospect and that if this is to occur, it would probably not be until after the August 2^nd US debt ceiling deadline, as market reactions to this event could bring some correction to the USD/JPY price movements we have seen this year.

In New Zealand, the RBNZ left interest rates unchanged at 2.5%. The central bank Governor (Bollard) released a statement suggesting that the current rate hike expectations are incorrect and that the 2.5% rate is overly accommodative.  He went on to say that the value of the currency (which is trading at all time highs) will be helpful for containing inflationary pressures.  Rate expectations in this region (with Australia included) are at a critical juncture and will have a large effect on equity and commodity prices for the remainder of the year.  Analysts are currently divided on how things will proceed in this region (which is a sharp contrast from the more stable forecasts in the other major economies) so central bank commentary will take on greater importance until the macro data gives us a clearer picture of the regional performance.

Technicals:

Oil is consolidating after its recent losses.  After falling from psychological and Fib resistance in the 100$ area, we are seeing 3 successive lower highs on the daily charts and the burgeoning uptrend line on the hourly charts was broken yesterday, which suggests that the declines are now set to continue.  This bearish bias will change if resistance at 100.50$ is overtaken.  Current targets are seen at the 93.30$ and 89.70$ support levels.  Any breaks here will be an extremely ominous sign and target support levels in the lower 80s.

The US Dollar was broadly lower against the majors (the Aussie, in particular) in Asian trading as second quarter CPI readings in Australia came in higher than expected.  US lawmakers are not helping the situation, as debt ceiling discussions continue to find obstacles and the latest statements from the President suggest that both sides appear unwilling to make concessions and many analysts are now saying that even if a deal is reached before the August 2^nd deadline, it is unlikely to be long-term in nature and we will probably be revisiting this same issue again in the next few quarters.  In macro data, US consumer confidence numbers were higher than the previous reading but housing sales misses consensus estimates.  The EUR/USD trades higher at 1.4490-1.4540 with the USD/JPY lower at 77.75-78.00.

Moody’s downgraded the credit rating of Cyprus by 2 levels (to Baa1), giving the argument that the country is heavily exposed to the Greek banking sector.  One ECB Council member (Lipstok) was on the wires saying that interest rates remain at low historical levels (even with the recent rate increase) so the hawkish tone of his comments was relatively surprising.  Macro reports will come with Eurozone M3 money supply data and German CPI for Wednesday.

Reuters released an article citing anonymous sources who suggested that the Bank of Japan is considering a foreign exchange intervention move, as the value of the Yen continues to surge higher.  This move, however, would not be similar to the one seen in March, which was a collaborative event between a variety of central banks.  Any intervention here would be completed by the BoJ alone, so the action is unlikely to have the same effect.

In the UK, GDP figures were inline with expectations (a +0.2% quarterly rise).  A 0.2% rise is still weak on a historical basis, so the question going forward will be whether or now we will see another round of quantitative easing in the country.  Arguments against this possibility would center on the fact that consumer prices are still trending higher, so another instance of QE would be unhelpful for slowing down inflationary pressures.

The Aussie Dollar rose to an all time high after a report showed that second quarter CPI was higher than estimated (at +0.9% for the quarterly figures and +3.6% for the yearly figures).  The New Zealand Finance Minister (English) gave an interview and suggested that the nation’s currency is now being viewed as a safe haven but many would argue that the low liquidity levels of the NZD would make this assertion somewhat difficult to believe.  He did go on to say that a stronger currency and a decline in commodity prices would not be beneficial for New Zealand.

In Switzerland, the KoF leading indicator will be released Wednesday, with the market expecting a drop to 2.11 (from 2.23 previously) but even with a drop like this, we remain at historically elevated levels.  This is not suggestive of deflationary pressures, so it is unlikely that the central bank will make changes in monetary policy even with the extreme levels that are currently seen in the Franc.

IG Index, the UK leading spread betting company, expanded its fixed income market offer by adding Italian Treasuries to its German, UK, US and Japanese sovereign instruments.

Spread bettors usually like to open positions in volatile markets in order to lock in profits in the short term. Debt or fixed income markets are known as slow moving and it takes time for a yield on sovereign debt to change. Recent economic developments in Europe, where a financial crisis hit countries at the Government level, along with very active ratings agencies, changed the way sovereign debt markets move. Investors are very sensitive to any ratings change in the actual context, and have their eyes wide open and focused on any political intervention that can impact a nation’s risk. The result is increased volatility in sovereign debt and an accompanying spread betting interest.

Italy, one of the PIIGS members, has recently been under close observation by both investors and EU officials. Economic data has been pointing to some cooling in the country and debt is rising to unmanageable proportions. Some think Italy may be the next EU country needing some bailout help and yields on Government debt for 10-year notes rose to 6%. As we have assisted recently, these yields can very quickly rise to 10% or more, as was the case for Portugal and Ireland. Traders are aware of the situation, and have a growing interest in these markets.

IG Index has been offering several quarterlies in German BUNDs and BOBLs, Gilts, US T-Notes, and other sovereigns. From now on, IG clients can also trade Italian Treasuries, known as Buoni del Tesoro Poliennali (BTPs). This new bond contract is offered in a quarterly basis with expiry dates in March, June, September, and December. In order to trade these instruments, clients should look for the Bonds and Moneymarket tab under the IG trading platform and choose the desired market. At the time of writing, IG Index is offering Long-Term BTP for September that is trading at 10,181 – 10,187. The minimum stake is £2 and the deposit factor is set to 350.

The US debt ceiling deadlines continue to be the main focus and dual speeches by Barak Obama and the congressional leadership showed that no significant progress has been made by either side to make concessions and reach an agreement for the federal budget.  This has injected some volatility into the humdrum summer markets, as the risk of a US default is growing increasingly possible.  This has essentially led to lower equity markets and Dollar selling, as the EUR/USD has moved up to 1.4360-1.4500 and the USD/JPY at 77.85-78.75.  The Swiss Franc and Gold have continued to find safe haven buyers, with both reaching all time highs in recent sessions.

At this stage, most analysts expect these disagreements to continue until the 11^th hour, and if this is the case, we can expect the current volatility to continue defining price activity.  Macro data today will come in the form of second quarter GDP from the UK, while in the US, consumer confidence surveys will be released alongside the Case-Shiller Home Price Index.

The Greek Finance Minister (Venizelos) went to Washington D.C. to meet with finance officials and spoke to reporters, saying that Greece has maintained its solvency and will continue to improve its domestic budgeting strategies.  The comments were largely meant to rebuild optimism but there was no substantive commentary conveying new policy information.

There have been recent remarks from the ECB suggesting that a fiscal union is something that should be considered, and this sentiment was echoed by ECB President Trichet.  Macro data for Tuesday will come with the GfK Consumer Confidence figures, with expectations looking for a decline to 5.6.  During the remainder of the week, European CPI data will be seen, so any releases that are lower than the forecasts will lead to expectations that the tightening bias currently held by the ECB could see some changes.

In Japan, the Finance Minister made more comments referring to the current strength of the Yen, calling the volatility “one sided,” which is essentially a suggestion that the Bank of Japan is considering intervention moves to help turn prices around against the major currencies.

In the UK, second quarter GDP is expected to come in at +0.2% (quarterly basis).  If we see negative numbers at the release, markets will revisit quantitative easing discussions, which is something that has been seen in isolated instances from some of the region’s policy officials.  Growth forecasts have recently been revised downward in the UK, so today’s numbers will get special attention.

In Australia, the central bank governor (Stevens) made a speech last night but chose not to make specific references to interest rate policy but did actually speak of some of the benefits of having a strong currency.  This was essentially an invitation to buy the Aussie Dollar, and the market responded in turn.  On Wednesday, the second quarter CPI data will be key for gauging interest rate moves for the remainder of 2011.  In New Zealand, the June trade balance numbers were weaker than estimates on a significant decline in exporter activity.