USD - US Stocks and Treasury prices fell while gold climbed to records after President Obama and Congress failed to reach a deal on raising the debt ceiling. The greenback is likely to remain vulnerable to this week especially against the CHF and JPY. A failure to raise the debt ceiling in time manner would likely force the US government to prioritize debt payments and sharply cut back on government spending significantly increasing the risk of another US recession. Last week saw some wild swings in sentiment in the FX markets. The driving factors behind these were primarily debt issues, most notably in the Eurozone but also the US. A pushing out of expectations for interest rate increases particularly in the US look set to continue playing a major part in the coming days. This week's data calendar, though, is relatively light. The housing market, however, features with starts/permits and existing homes sales for June scheduled along with the NAHB house builders sentiment index for July. Even with a modest improvement, these releases are likely to underline the depressed nature of the market. The July Philly Fed index will also attract attention, along with the latest weekly jobless numbers, as the market searches for any signs that the economy is recovering for the recent soft patch.
EUR - The euro rose as market concerns over Greece eased after a broad agreement for an aid package to the beleaguered country was reached by European leaders. The single currency remains near last week's highs above $1.44 as focus now turns to the debt ceiling debate in the US. Ratings agency Moody's cut Greece's credit rating further today to Ca, one notch above default, giving it the lowest rating of any country covered by ratings agency. Markets were largely unfazed by the move, taking assurance from the second rescue package for Greece totaling over EUR 109 billion from public and private sources announced last week. With the uncertainty over Greece reduced, focus shifts to the US and the debt ceiling debate which is contributing to dollar instability and lending near term support to the euro.
GBP - Despite some poor housing data that had initially provided some downward pressure, sterling is trading flat from Friday, which was the highest level seen in over a week. The 100 day moving average (1.6244) should provide support and a move below will depend on both the US debt ceiling picture as well as tomorrow's Q2 GDP release. It is expected to come in at 0.2% from the previous quarter, which will actually reduce the YoY number to 0.8% (down from 1.6%). This should put less pressure on the BoE to raise rates as economic growth is clearly slowing.
JPY - JPY has gained 0.6% from Friday's close, driven by safe-haven demand and stirring more talk from Japanese officials speaking to recent JPY strength as being 'one?sided'. Current USJPY levels are the lowest since the intraday moves seen following the March earthquakes and have closed below 79.00 for several consecutive sessions.
CAD - The CAD has consolidated towards the top of its recent ranges on the rising price of oil, but also as investors increasingly turn to it as a relatively safe currency. The loonie also begins the week higher on increased speculation that the BoC will raise interest rates at least once in the second half of the year as inflationary pressures begin to mount. A report due later this week, expected to show the Canadian economy growing at a quickened pace in June, will likely provide further support for the CAD as investors look for alternatives to the USD and EUR with the ongoing struggles with debt.
MXN - The peso stayed within its recent ranges despite setbacks on the nation's retail sales. INEGI reported retail sales had increased by only 1% y/y in May vs. the 3.1% y/y expected, while the m/m seasonally-adjusted total had skid by 2.1%. The contraction was the largest decline since April of 2010 and coincided with the period immediately after the supply chain disruptions created by the Japanese earthquake and the acceleration of Greek debt. With negative external influences and softening consumer environment, the MXN will likely be pressured for the time being.
AUD - The AUD remains near the top of its recent ranges and at the best levels since early May. While the Eurozone and US debt struggles, combined with apparently slower economic growth in China, have weighed on commodities and stocks, the AUD has been surprisingly resilient as emerging market central banks diversify their FX holdings to include a growing AUD position. Nevertheless, Chinese economic growth remains paramount for Australia. Slowing growth in China could weigh on the Australian economy as the South Pacific nation's mining boom cools. Investors will take note of Australian CPI numbers due tomorrow with the forecasted modest contraction possibly muting expectations for tighter Australian monetary policy in the near term.