Beta 2 Forex News, Jovi Overo, Beta 2 Ltd, Wednesday July 27 2011

The Congressional Budget Office informed the GOP that the plan presented by Speaker of the House John Boehner would only cut $850 billion from the budget deficit. Boehner himself had pledged to initially cut $1.2 trillion in spending over the next 10 years. In a blow to Republicans the bill will be sent back for rewriting and throw a wrench in a potential solution to raise the US debt ceiling.

While the debt ceiling negotiations takes the limelight US data yesterday showed disappointing data that fed into USD selling. Housing data continues to drag with the S&P Case-Shiller HPI showing a dip in housing prices by -4.5%. New home sales fell short at 312K on expectations of 321K while the Richmond Manufacturing Index declined to -1 from 3. A bright spot in yesterday’s data were increasing consumer confidence numbers but the three previous negative data releases combined with a very public debt ceiling fight had the greenback on its back foot.

Strong gains were booked against the dollar by all of the G7 currencies with significant moves in the dollar block currencies. Pressures in the financial markets are predominantly felt in the USD with the dollar index falling to a low of 73.446. The last time the dollar index traded this low was in May. Despite the USD weakness it appears that real money portfolio managers are expecting a positive outcome from the debt ceiling struggles as the yield on the 10-year note actually fell yesterday back below the 3% level. 30-year Treasuries also strengthened. If markets were forecasting a US default, pressures would be felt in the US government bond yields.

Sterling performed well yesterday after Q2 GDP numbers came in line with consensus forecasts at 0.2%. Traders were largely expecting a more disappointing figure. While growth of 0.2% is nothing to brag home about and does signal a stagnant UK economy, a figure that came in below this level may have supported additional asset purchases by the BOE. The GDP report does not rule out more quantitative easing but sets the bar a bit higher for additional easing of monetary policy. While the British pound is certainly no prize, in a contest of the least ugly with the dollar and the euro, it may just be pulling ahead.

The GDP data helped cable climb to its highest level since mid-June, rising above the previously broken trend line from the May 2010 low. The next resistance for the GBP/USD is found at the end of May high at 1.6550. Support is located at this week’s low at 1.6220.

The dollar block currencies were the strongest performers yesterday versus a weak US dollar. The AUD was supported by both comments from RBA Governor Stevens who suggested the Australian economy is improving and talked down a potential interest rate cut this year. Inflationary pressures also supported the AUD. Q2 inflation climbed 0.9% on consensus forecasts of 0.7%. Following the data release this morning traders pushed the AUD/USD to a 30-year high. The next target for the AUD/USD is the big round number at 1.1100.

 

The Kiwi is also trading at a 30-year high after strong business confidence numbers helped to boost the New Zealand dollar. Tonight the RBNZ is expected to keep the cash rate steady at 2.50% but the accompanying rate statement could contain more hawkish language given the strong GDP the New Zealand economy produced in H1. Any hint of an interest rate increase could boost the NZD/USD to the next big round number at 0.8800.

Spot gold climbed to a new all-time high at $1,625. This is the second consecutive day the price of spot gold has reached a new high as traders worry over the US debt ceiling crisis. Spot gold may also be receiving a bid due to the potential for the US to lose its AAA rating. S&P has warned its highest rating could be in jeopardy if the US doesn’t cut $4 trillion from the debt. On Monday President Obama warned the US could lose its rating for the first time in history. More gains in the commodity could be booked should Congress and the President fail to come to an agreement over the debt ceiling.

Jovi Overo