Commodity FX Rallies on Debt Ceiling Progress

Signs of an agreement on the US debt ceiling led to blockbuster day on markets. Hopes for a dramatic resolution to the European debt crisis were dimmed. The commodity currencies were the outperformers with NZD, AUD and CAD leading while CHF and JPY lagged.

Obama endorsed a plan that was introduced by the bi-partisan Gang of Six that would reduce the deficit by $3.7 trillion over 10 years. The deficit is expected at roughly $1.2 trillion in fiscal 2011. The plan has so far gained support but it is broad, ambitious and the risk is that it fail apart on the details, which are vague so far. The broad strokes include spending cuts and overhauls to Medicare and Social Security.

THE KEY HURDLE MAY BE PROPOSED REVISIONS TO THE TAX CODE, something that has been rejected by House Republicans. The race is now on to hammer out the details and sign-off on legislation in time to beat the Aug. 2 deadline. We feel most of the good news may be priced in here and would be very surprised if the process of passing this legislation is smooth. The White House and Senate appear on board but there has been no word from the Republican-controlled House. THE DOLLAR WILL BE VULNERABLE to headlines from House majority leader Cantor and Speaker Boehner.

The debt news helped the S&P 500 surge 1.6% to 1327 in the largest rally of 2011. The loser on the debt ceiling news was precious metals; gold fell $15 to $1585 and silver was lower $1.38 to $38.96.

Germanys Merkel lowered expectations for Thursdays EU summit, saying a spectacular solution to the debt crisis is unlikely. EUR/USD was trading over 1.42 before her comments but has since slipped to 1.4150.

Ashraf's long recommendations in stocks and crude from earlier today have already hit initial targets. Several euro and yen trades are in progress as well.

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Other news:

- Goldman Sachs announced 1000 layoffs after earning $1.85 per share compared to the $2.30 expected.

- Bank of America and Johnson & Johnson also missed while Coca-Cola beat.

- The big news came after hours as Apple crushed the consensus by earning $7.79 vs. $5.42.

- US housing starts rose to 630K from 550K, easily beating the 570K expected.

The Asia-Pacific session features muted news flow. A headline from Nikkei suggested Honda has cut its Chinese car sales target by 13%. If this is due to slower-than-expected consumer spending, we may see AUD pulled down early in Asia-Pacific trading. We also get the Conference Boards leading index for China at 0200 GMT.