The dual focus for US markets overnight was once again the enduring US debt ceiling talks with a particularly uninspiring manufacturing release thrown in for good measures. It appears markets are divided between relief and despair - while it looks like we have a water-tight deal in place over the debt ceiling (congress vote currently taking place), market participants were discouraged by the latest ISM manufacturing read which recorded an index level of 50.9 in July against estimates of 55. While a reading of 50 an above denotes expansion in the manufacturing sector, the recent theme of economic weakness has investors questioning whether this is simply a "soft patch". Whatever the case, the term "double dip" has once again entered the vocabulary of global markets. Growth data last week also cast a shadow on the US economic outlook showing GDP rising at an annual pace of 1.3 percent in the second quarter, falling short of the expected 1.8 percent growth. To add fuel to the fire, first quarter growth numbers were revised down from 1.9 to 0.4 percent.
In contrast to domestic trade, overnight currency movements reflected a risk-off environment with the US dollar unwinding gains seen against the Swiss and Yen, but making considerable ground against risk currencies. The Euro led the risk currency decline falling through two big figures to week lows of $US1.4184 but managed to regain ground as the US session drew to a close. We have a situation where the focus which has been squarely on the US is now being directed back to the economic uncertainties across the Atlantic - Euro price action reflected this uncertainty.
After a solid risk-driven local session, the Aussie dollar pared gains overnight with price action sinking to lows of $US1.0922. The local unit managed to regain some composure over the course of US trade to current levels of $US1.0970 - and remains at a particularly good vantage point to once again make a convincing break of $US1.10.
Today will see the focus to the Reserve Bank interest rates decision which we expect will see the RBA keep benchmark interest rates at 4.75 percent. While last week's CPI may have screamed a near term interest rate hike is on the cards, it may not yet be enough to force the hand of the RBA - however we do expect the ensuing statement to take a slightly more hawkish tone, which by default implies further strength from the local unit.