Debt Ceiling Deal Set, Focus Shifts to Economy

The Republicans-controlled House voted to increase the debt ceiling, clearing the most formidable hurdle and all signs suggest the measure will pass through the Senate on Tuesday and the White House shortly after. But the positive sentiment from the deal lasted only hours as US manufacturing data disappointed.

House Republicans voted to pass the debt deal shortly before the US session ended and based on the accounts of the most reputable journalists in Washington, the deal is now virtually certain to pass. The market is now free to focus on the economy and will watch out for verdicts from the ratings agencies. A DOWNGRADE FROM S&P IS LOOKING LESS LIKELY after analysts there claimed on the weekend that quotes suggesting the necessity of $4 trillion in cuts were taken out of context.

EUR lagged followed by GBP. CHF was the best performer followed by USD in a violent first day of trading in August. EUR/USD traded in a wide range between 1.4187 and 1.4454. Sentiment was positive early on but was washed out by the July ISM manufacturing report which stole the spotlight from Washington as it fell to 50.9 compared to the 54.8 consensus and 55.3 prior. It was the worst reading in two years and barely over the 50 threshold for growth. New orders contracted for the first time in 24 months and the ratio of new orders to inventories was negative for the second straight month, a metric that has foretold recessions in the past.

The fall in the employment component to 53.5 from 59.9 prompted downgrades to NFP forecasts ahead of Fridays report with the market consensus is sliding to +50K from +90K.

The S&P 500 fell as low as 1274 after the IMS but rebounded to close at 1287, declining 0.4% but closing above the 200dma. Although stocks bounced back, they have declined in six straight sessions and the 200dma has failed to provide the kind of bounce we saw in June. Volatility generally leads to negativity as passive investors get nervous and go into cash; this should translate into further JPY and CHF strength with GBP, AUD and CAD vulnerable.

Nikkei news is reporting that the Japanese Ministry of Finance is preparing to intervene. There is also talk that the BOJ will introduce new easing later this week. Policymakers are hoping the two-pronged attack halts the fall of USD/JPY but it is a longshot. If anything, traders will be looking to sell USD/JPY bounces. The only intervention with a chance of success is coordinated intervention, and as Ashraf has repeatedly mentioned, the JPY is not especially strong against most G10 currencies.