FOREX: Yen and Franc Slump on US Debt Deal, ISM Data on Tap

The Yen and Franc tumbled while the Aussie soared after lawmakers struck a deal to raise the US debt limit, but ISM manufacturing data will test the bulls' resolve.

Talking Points

• Japanese Yen, Swiss Franc Sold as US Leaders Strike Debt Deal
• US Dollar Torn Between Sentiment Trends, Fundamental Forces
• UK PMI, Euro Zone Jobs Data to Take Back Seat to Risk Trends
• ISM Manufacturing Data May Set Tone for Rest of Trading Week

Financial markets breathed a sigh of relief as US lawmakers announced an agreement was reached between Congressional leaders and President Obama that would raise the nation's debt ceiling before the dreaded August 2nd deadline while a long-term deficit reduction plan will be introduced to appease the ratings agencies ward off the threat of a downgrade. Asian shares soared, with the MSCI Asia Pacific regional stock index adding 1.7 percent, while the sentiment-sensitive Australian, Canadian and New Zealand Dollars advanced against their leading counterparts.

Standby anti-risk currencies predictably suffered, with the Japanese Yen bearing the brunt of selling pressure and the Swiss Franc not far behind. The likewise safe-haven US Dollar put in a mixed performance, with the benchmark EURUSD exchange rate perhaps the best reflection of the difficult balance between risk-driven selling pressure and the fundamentally US-positive nature of news flow. The currency pair went virtually nowhere, oscillating in a narrow range below the 1.44 figure.

Looking ahead, S&P 500 stock index futures are up well over a full percentage point in late Asian trade, hinting the chipper mood will carry forward into European hours. A quiet economic calendar seems all the more conducive for a sentiment-driven session, with UK Manufacturing PMI and Euro Zone Unemployment readings amounting to the only bit of noteworthy event risk. The former is expected to fall for the sixth consecutive month – reinforcing the likelihood of a static Bank of England outcome later in the week – while the latter keeps the jobless unchanged yet again at 9.9 percent. On balance, these outcomes present nothing as market-moving as the forces now driving risk appetite and so both should pass with little fanfare.

Things begin interesting in the second half of the session as Wall Street comes online, with the North American morning seeing the ISM Manufacturing gauge come across the wires even as markets wait for both chambers of the US Congress to vote on the debt compromise now before them. Needless to say, failure to pass it is likely to amount to catastrophe for risk appetite, but such an outcome seems highly unlikely considering no politician will want to face his electorate with a record of a “No” vote to his/her name if failing to secure a deal indeed unleashes the full breadth of the markets' wrath. The ISM reading is far more intriguing however; expectations call for a decline, and traders' reaction to it ought to be an interesting test of whether sentiment can stand up on the strength of a resolution to the immediate US fiscal crisis amid mounting evidence of a global economic slowdown in the second half of the year.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
23:01	GBP	Lloyds Business Barometer (JUL)	19	-	36
23:30	AUD	AiG Performance of Manufacturing Index (JUL)	43.4	-	52.9
0:30	AUD	TD Securities Inflation (MoM) (JUL)	0.3%	-	0.0%
0:30	AUD	TD Securities Inflation (YoY) (JUL)	3.2%	-	2.9%
0:40	USD	Obama's Press Conference on Debt Agreement	-	-	-
1:00	NZD	ANZ Commodity Price (JUL)	-0.1%	-	-1.2%
1:00	CNY	PMI Manufacturing (JUL)	50.7	50.2	50.9
1:00	AUD	HIA New Home Sales (MoM)	-8.7%	-	-0.2%
2:30	CNY	HSBC Manufacturing PMI (JUL)	49.3	-	50.1
5:00	JPY	Vehicle Sales (YoY) (JUL)	-27.6%	-	-23.3%

Euro Session: What to Expect

GMT	CCY		EXP	PREV	IMPACT
7:45	EUR	Italian PMI Manufacturing (JUL)	49	49.9	Low
7:50	EUR	French PMI Manufacturing (JUL F)	50.1	50.1	Low
7:55	EUR	German PMI Manufacturing (JUL F)	52.1	52.1	Medium
8:00	EUR	Italian Unemployment Rate (SA) (JUL P)	-	8.1%	Low
8:00	EUR	Euro-Zone PMI Manufacturing (JUL F)	50.4	50.4	Medium
8:30	GBP	PMI Manufacturing (JUL)	51.0	51.3	Medium
9:00	EUR	Euro-Zone Unemployment Rate (JUN)	9.9%	9.9%	Medium
16:00	EUR	Italian New Car Registrations (YoY) (JUL)	-	-1.7%	Low
17:00	EUR	Italian Budget Balance (€) (YTD) (JUL)	-	-43.5B	Low
17:00	EUR	Italian Budget Balance (€) (JUL)	-	1.3B	Low

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.4281	1.4530
GBPUSD	1.6301	1.6596

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