An air of complacency surrounding the US debt ceiling negations continued overnight, with market reaction to the collapse of negations not nearly as destructive as thought possible. The impasse between the Republicans and Democrats has promoted some mild resistance to risk assets, but thus far has failed to put a significant dent in risk currencies. There has been selective weakness from the greenback with losses against traditional safe havens. Notably the USDCHF pair has forged a new all-time low of CHF0.8020 and remains stubbornly below CHF0.8100. The Japanese Yen also remained in form with the USDJPY pair moving to fresh lows not seen since March.
Both parities unveiled plans overnight with the Republicans proposing raise the debt ceiling by $US1 trillion through to the end of 2011 while the Democrats proposed to raise the ceiling by $US2.4 trillion past the 2012 elections.
Cleary the never-ending soap opera that is the US debt ceiling saga will continue to play a major role in sentiment in the week ahead, thus a key directive for the Aussie dollar. While our central case remains A$-positive, we believe the likely catalyst for further Aussie dollar strength is not likely to come from further negativity surrounding the US debt ceiling. On the contrary, if one were to expect some sort of meaningful resolution or progress on the debt ceiling debate before the August 2 deadline, this has the propensity to fuel a relief rally of sorts which can work in the favor or risk assets. That said we expect near-term US dollar negativity to continue to manifest in safe-haven plays such as the Swiss franc, Yen and Gold. At the time of writing the local unit is continuing to display resilience around the 108.5 US cents after peaking at resistance levels of 108.75 US cents overnight.
Local economic news today will see the release of the conference board leading index at 10am AEST although the key market mover may come from President Obama's address at 11am AEST. RBA Governor Glenn Stevens will also speak in Sydney at 1pm in a speech entitled 'Issues in Economic Policy.'
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