Intraday Market Thoughts Archives

Debt ceiling drama was compounded by a dreadful report on US GDP leading to risk off moves in the forex market. JPY and CHF were major gainers with CAD lagging. Fridays CFTC report showed growing USD shorts in everything but CHF. See the link to our latest Friday Premium Trades ahead of Asia's Monday Open.

US GDP was abysmal, one of the worst GDP reports in recent memory and it showed in markets. Growth in the second quarter was +1.3% compared to the +1.8% expected. A portion of this may have been priced in after Thursdays weak durable goods orders but the bigger story was a huge downward revision to Q1 (from +1.9% to +0.4%). Combined, the reports showed the US economy grew just 0.4% in the first half of the year (not annualized).

Other details were also poor including personal consumption which inched up 0.1% compared to the +0.8% expected. Note that government spending cuts have subtracted an average of 0.7 percentage points from GDP over the past three quarters. Given the debt ceiling debate in Washington, we expect this to continue.

Trading was volatile on Friday as debt ceiling rumours and news swayed sentiment. The S&P 500 declined to as low as 1282 at the open the rebounded into positive territory at 1303 before closing down 0.6% to 1292. TECHNICALS PLAYED A HUGE PART of Fridays trading as the S&P 500 bounced off the 200-day moving average for the third time in the past six weeks. Stock market losses would have been much deeper If not for the technicals, traders trying to front-run equity flows into the start of August and short-term trades betting on a resolution to the debt ceiling.

The Chicago PMI also missed expectations and the employment component fell to 51 from 58. U of Mich consumer sentiment was a touch soft and remains at the lowest since March 2009.

CAD took a double whammy from the soft US report and a domestic GDP report that showed a 0.3% contraction in May compared to the +0.1% expected. Much of the miss appears to be due to temporary shutdowns in the energy and mining sectors that will be reversed. Still, its looking like Q2 GDP will be flattish in Canada after 3.5% growth in Q1 and Q42010 but thats no surprise given the numbers we saw today from the US.

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LOOKING BACK AT THE MONTH OF JULY, the top currencies were easily NZD, CHF and JPY. The euro was the laggard, followed closely by USD.

Some other thoughts on the monthly charts:

- USD/JPY fell to within 3 pips of the all-time (post tsunami) low on Friday and closed very close to that level.

- USD/CHF declined more than 500 pips on the month and closed at the monthly low (which is an all-time low). The pair has declined in 11 of the past 13 months with the two increases averaging just 150 pips.

- AUD/USD printed all time high weekly and monthly CLOSES in as the pair finished up just below 1.10. The monthly candlestick pattern is also bullish.

- EUR/USD was flattish for the second month.

Fridays CFTC commitment of traders report showed aversion to USD with net shorts increasing 20%. With a large gain in GBP longs, every currency is now held net long against USD. The yen was the leading pick of speculative traders in the week followed by EUR and CAD. The Swiss franc was the only currency to see its position trimmed against USD as it fell by 3.6K to +7.8K (were guessing there are some people who wish they held the USD/CHF shorts a bit longer). The data covers through Tues, July 26.

USD is stronger in the ongoing session after Moodys placed Spanish AA2 rating on review. Euro ignores strong German Retail Sales; Eurozone CPI lower. US session will bring Canadian and US advance Q2 GDP, Chicago PMI

Only a few hours after Moodys placed Spanish rating on a review and downgraded ratings of six Spanish regions, the government decided to dissolve the parliament and hold elections by the end of November. In a typical risk off environment, higher yielding currencies and the Euro are sold while the USD, the CHF and the JPY benefit.

German Retail Sales in June jumped up significantly to 6.3% from previous -2.8% and Eurozone CPI fell in July to 2.5% from previous 2.7%. In the UK Mortgage Approvals increased in June to 48K from 46K. Neither the common currency nor the Sterling could benefit from these news as the underlying risk off sentiment is powerful.

Voting on the Republican proposal was postponed yesterday and should happen today. Should the proposal be passed, especially if it happens in the afternoon, illiquid Friday markets would exaggerate the moves.

The US session will bring GDP data for Canada and the US and also the PMI indicator from the Chicago area. Canadian May GDP due at 8:30 am ET is expected to increase by 0.1% from an unchanged print in April while the y/y print is seen steady at 2.8%.

Second quarter US GDP is seen lower at 1.7% from previous 1.9%. Poor data that we have seen over the past few months, especially weak labor market, disappointing retail sales and worsening PMI data, support the notion of a low print which is likely to reignite talks about how temporary the current slowdown is.

July Chicago PMI due at 9:45 am ET is expected to print 60.1 from previous 61.1

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European sovereign risks resurface, as Moodys puts Spain on notice for a possible downgrade, ahead of CPI numbers, UK mortgage approvals set to disappoint, Debt ceiling drama rumbles as markets await US Q2 GDP, Canada GDP.

The single currency continues to be buffeted by the winds of the sovereign debt crisis after this mornings decision by Moodys to put Spain on notice for a possible downgrade. Renewed concerns about political instability in Italy yesterday had already set the tone with bond yields pushing higher. Bond auctions yesterday saw 10 year yields hit 11 year highs as Italy tapped the bond markets for of 2014/2015/2018 and 2021 bonds.

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Demand wasnt great and yields were elevated as the gap between Italian and Spanish borrowing costs continued to narrow as Italys plight continues to worsen. A week ago Italian borrowing costs in the 10 year were 40 points below Spains however now they are only 20 points.

This mornings release of Eurozone flash CPI for July will be closely monitored for evidence of increased pricing pressures in light of the unexpected jump in German borrowing costs earlier this week. Expectations are for the figures to remain the same as last month at 2.7%, however any increase will raise fears of a hawkish ECB meeting next week given Noyers comments about strong alertness a couple of days ago. Given recent events you would have to think that the ECB would be mad to consider being too hawkish next week, but given their recent track record you wouldnt bet against it.

In the UK gilts have become somewhat of a safe haven given the events in Europe and the US, however given recent economic data and this weeks growth figures thats not saying much. Todays mortgage approvals data is expected to confirm that the housing market remains in the doldrums along with consumer sentiment after yesterdays disappointing CBI sales retails figures. Expectations for June are expected to come in around 46k, pretty much unchanged from May.

Japanese industry continues to struggle from the effects of the March tsunami as industrial production for June came in below expectations rising 3.9%, below expectations of 4.5%.

The US debt ceiling story looks set to rumble on into the final strait with still no signs of an imminent agreement and the politicians as far apart as ever. Despite pleas from business leaders and world leaders for politicians to come to some agreement, the uncertainty looks set to drag into the weekend. Ahead of that we have the small matter of US Q2 GDP growth figures and markets will be hoping that the recent uncertainty and poor economic data doesnt translate into a miss on the GDP front. As it is the numbers have already been revised down with expectations now at 1.8%, down from Q1s final 1.9%.

At the same time Canada Q2 GDP is also due out.

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Optimism from improving us jobs figures was washed away by downgrade warnings and debt ceiling drama. JPY and GBP were the top performers while AUD and NZD lagged but overall moves were small. The market is awaiting a debt ceiling vote and a slate of Japanese data. Also the status on Thursday's latest trades.

Initial jobless claims boosted sentiment in early New York trading as claims fell to 398K from 422K and beat the 412K expectation. It was the lowest reading since April and may have been even better than it looked because without seasonal adjustments, claims fell by more than 100K.

The S&P 500 rose as high as 1316 in the first hours of trading but declined late in the day and closed near the session lows at 1301, down 0.3%. The risk trade in currencies followed a similar pattern.

Sentiment worsened after S&P sovereign-rating chief John Chambers re-emphasized the importance of $4 trillion in savings. Both parties are currently proposing less than $3 trillion in savings.

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Republicans postponed a vote on Boehners debt ceiling plan minutes before it was scheduled, likely because they did not have the votes in their own caucus to pass it. In any case, the legislation had no chance of getting by the Senate or the White House, so the delay could be helpful for negotiations. A vote is expected later in the evening but it is unlikely to move markets.

VP Biden is said to be in talks with Senate Republican leader Mitch McConnell on a deal. McConnell earlier said THE ONLY REAL STICKING POINT between the two sides is a Republican insistence on a two-stage ceiling increase process.

MNI reports that the Treasury will begin prioritizing payments on Aug. 2, with bondholders at the top of the queue. A plan will be released Friday after the market close. There is talk of large-scale redemptions in money market funds if the US hits the default limit. This could potentially have cascading consequences. Its unlikely, but its a risk. There are also reports that a short-term debt limit extension may be possible if no agreement can be reached.

Asia-Pacific Preview

A broad slate of economic data from Japan will be released at 2330 GMT including CPI, employment and household spending. Industrial production will follow 20 minutes later. All the data is for June.

Retail sales handily beat expectations yesterday so there is an upside bias in household spending. Expectations are for a 2.3% y/y contraction, which will be the ninth straight decline.

Unemployment is expected to rise to 4.6% in June from 4.5%. Data from the prefectures hardest hit by the tsunami has not been included since March.

Core CPI is expected to rise 0.5% y/y but a benchmark revision on Aug. 12 is forecast to shave 0.72 percentage points and show that deflation is continuing. Its difficult to strategize around these numbers because of potential skews from the disaster but overall we expect a straightforward reaction with JPY strength on upbeat growth numbers.

Shedding further light on Tuesday's Premium piece regarding the decline in correlation between EURUSD and S&P500; several readers have asked us how come the correlation has declined while both EURUSD & S&P500 moved lower yesterday. Premium members can see the full explanation in today's Premium "Intermarket Insights" in this link: http://ashraflaidi.com/products/sub01/access/?a=464 Click here to become a member: http://ashraflaidi.com/products/sub01/

Also see our insights on the Bank of Japan and JPY

USD has had a slight upside bias since London open with the majority of gains seen against the EUR and GBP. German labor market worsened slightly, Eurozone economic sentiment fell and UK CBI Sales dropped. Focus turns to Pending Home Sales. Our Thursday Premium trades are up, New trades for USDJPY, EURUSD, EURGBP, FTSE-100, S&P500, while our trades on Gold & Silver remain in progress.

Euro fell on combination of weak data and renewed rumors that Italian finance minister Tremonti is about to resign. These factors, combined with low demand from domestic buyers seen during recent Italian bond auctions, sent Italian yields higher. As a consequence, Italian/German 10 year spread widened. The latest 10 year bond auction worth of EUR 8 bln sold at the highest yield since February 2000.

On the data front, German Unemployment Change worsened in July to 11K people from previous -8K while the unemployment rate stayed the same and in line with expectation at 7%.

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Eurozone economic sentiment in July fell to 103.2 from previous 105.4 and UK CBI Realized Sales dropped to -5 from previous -2 which marks second negative print in a row after almost a year of positive readings.

The US session kicks off at 8:30 am ET with Jobless claims that continue to hover above the 400K mark. Labor market improvement is unlikely as long as claims continue to be stubbornly high.

10:00 am ET will bring June Pending Home sales data. After surging 8.2% in May, analysts expect sales to fall back below zero and print -1.5% as underlying trend remains soft. Weak labor market combined with large number of foreclosures suggests that the housing market has a long way towards a sustained recovery.

More ratings downgrades and slowing economic data in Europe raises fears about growth, German unemployment set to fall, Japanese retail sales continue to recover, US debt ceiling row overshadows growth concerns

Yesterdays downgrades of Cyprus by Moodys and Greece by S&P have refocused the markets attentions back onto the euro zone, even amongst all the trials and tribulations across the Atlantic Ocean in the US, with respect to the debt ceiling and fears about the USs AAA credit rating.

Combined with the recent slowdown in economic data in Europe, particularly in peripheral countries, the fear remains that contagion could well be starting to spill over into Italy and Spain.

Rising bond yields continue to reflect the stresses in the financial system especially in relation to Spain and Italy.

Yesterdays disappointing Italian business data has raised concerns about the ability of Italy to grow, in the face of a shrinking economy, spending cuts and a high euro.

Higher than expected German CPI data for July yesterday has also raised fears that the ECB may look at raising rates again in the near future given Noyers comments earlier this week. Concerns about German economic data have already started to manifest themselves in shrinking consumer confidence, falling PMIs and poor retail sales figures. Todays release of unemployment data is not expected to add to these fears but it wouldnt be a surprise if it did. Unemployment for July is expected to fall by 15k, while the unemployment rate is expected to stay unchanged at 7%.

Euro zone consumer confidence for July is also expected to remain at fairly low levels with expectations of another negative figure of -11.4, while the business climate index is expected to decline as well to 0.83.

In signs that Japanese consumers are slowly regaining their confidence after the tsunami three months ago, retail sales for June continue to improve on previous months with both the month on month and year on year figures moving into positive territory. Monthly retail sales rose 2.9% well above expectations of 1.5% and lifting the year on year figure into positive territory to 1.1% against expectations of a decline of 0.5%

In the US continued fears about economic recovery are playing second fiddle to the wranglings around raising the debt ceiling and agreeing a budget. Yesterdays Beige Book showed growth slowing in 8 out of the 12 regions, with particular concern with respect to the housing and employment market. Republicans plan to vote today on a reworking of speaker John Boehners proposal to cut nearly $1trn over 10 years. As the sides move closer together one of the sticking points appears to be the Republican demand for a second debt limit vote before the 2012 elections.

Weekly jobless claims are due out later this afternoon with hopes that the number will start to come down to the levels seen a couple of months ago when the numbers were below 400k.

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Markets soured Wednesday on the debt ceiling stalemate, poor economic data and the threat of a downgrade. Broad risk aversion hurt EUR and CAD while AUD and USD were top performers. The RBNZ held rates but hinted at a 50 bps hike in the near future.

The S&P 500 fell 2% to 1305 and is the process of putting in its worst weekly performance in almost a year.

According to the Beige Book, the pace of economic growth has moderated in 8 of 12 districts and that the pace of the recovery has slowed a line you will probably see in the upcoming FOMC statement. The jobs market remains discouraging. Input prices also moderated, meaning QE3 is more likely than the removal of any monetary stimulus. The report points to continued slow economic growth but no recession.

Durable goods orders tumbled 2.1% in June compared to the +0.3% expected. Non-defense capital goods ex-air fell 0.4% compared the +1.0% expected. The numbers point to the risk of a downside surprise in Fridays US GDP figures (exp: +1.7%).

Ashrafs USD/JPY short hit preliminary targets and fell to within 7 pips of the ultimate target. Gold hit initial targets before pulling back. Crude is resting just shy of the initial target.See the latest at: http://ashraflaidi.com/products/sub0/access/?a=462 NON-SUBSCRIBERS: http://ashraflaidi.com/products/sub01/

Not long ago, Geithner was pronouncing the US would never lose its top rating but now the market is in the process of pricing in a downgrade. The consensus is that the US dollar will continue to fall but it may not be as straight-forward as advertised (as we saw today). A continued decline in the stock market will provide a safe-haven boost to the USD as will higher bond yields. The resulting slowdown in the US economy may also weigh more heavily on Canada with risks to the other commodity producers and the economies most tied to US consumption.

At the moment, the situation is looking dire but whats has been lost is that DEBT CEILING NEGOTIATIONS ARE MAKING PROGRESS. Boehner is reworking his proposal and appears to have his own party on board. Reid is also looking for additional cuts in order to satisfy the dollar-for-dollar demands from Republicans. The sides now dont appear all that far apart and we estimate a 75% probability that will we have the framework for an agreement before markets close on Friday.

This will present the opportunity for a significant relief rally in the time between the passage of the legislation and decisions about the credit rating. Theres also the distinct possibility that the ratings agencies dont have the courage to downgrade the US. Based on this, there is room for a bounce in USD/CHF and USD/JPY -- both may have stabilized and at oversold levels.

THE RBNZ HELD RATES AT 2.50% as expected and Bollard said the economy grew more strongly than expected. The central bank leader telegraphed an upcoming rate hike by saying there is little need for the 50 bps March insurance rate cut to remain much longer. The market has priced in 100 bps in hikes in the next 12 months but nothing beyond 50 bps is guaranteed. Bollard may have done a good job talking down NZD by nothing that if the currencys strength persists, it will reduce the need for rate hikes.

USD is either unchanged or slightly higher against the major currencies since London open. German CPI is still being collected but regions that already announced results see somewhat higher readings. GBP weakens after CBI Industrial Order Expectations drops. US session will bring June Durable Goods orders. See Ashraf's latest shorts in S&P500 and US crude oil in the Premium Intermarket Insights as well as rest of the trades in EURUSD, EURGBP, Gold and Silver.

USD has been consolidating with mild upside bias. EURUSD weakened to 1.4450 and soon is likely to attract dip buyers. Unless we see a breakthrough in the debt ceiling talks, the USD weakness should resume.

German CPI data for July is still being collected with most regions so far reporting 0.4% - 0.5% increase. Some parts have seen higher than expected readings (Bavaria, Brandenburg, Hesse) and the region of Westphalia recorded the highest yearly CPI since 2008 at 2.7%. Higher final print would underpin the Euro.

GBPUSD fell about 40 points when CBI Industrial Order Expectations dropped in July to -10 from previous 1. Prints below zero indicate an expectation of a decreasing orders volume.

Swiss KOF Economic Barometer decreased in July to 2.04 from previous 2.23. According to UBS the fall can be attributed to the strength of the CHF that affects countrys industrial production. There were no lasting effects of this release and CHF continues to trade near historical highs.

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The New York session will start at 8:30 am ET with June Durable Goods Orders that are expected to decrease to 0.4% from 2.1%. Core Orders are also seen lower at 0.5% from previous 0.7%.

The Beige book that is due at 2:00 pm ET provides some of the information that FOMC will consider in their upcoming meeting on August 9th. While the Beige book release often impacts financial markets it is likely that any new developments in the debt ceiling saga will take precedence.

Traders should pay attention at 5:00 pm ET when New Zealand announces interest rates. Analysts see rates unchanged at 2.5%

Australian CPI sends AUDUSD to record highs, German inflation set to remain unchanged, UK CBI orders keeps growth story in focus and US debt ceiling saga rumbles on ahead of durable goods data. Silver breaks above $41 as Ashraf warned in Monday's Premium Intermarket Insights. The case was confirmed on Tuesday with illustrations of charts relative to gold. Premium Trades also shorted USDJPY to hit most of the targets 12 hours later.

Yesterdays decision by the Reserve Bank of India to raise interest rates by 50 basis points, more than the 25 points expected signals the determination of emerging market economies to deal with rising pricing pressures, as they followed in the footsteps of Brazil and China in the last two weeks in tightening monetary policy. It would also appear that pricing pressures in the Australian economy are also a cause for concern.

Australian CPI for the latest quarter saw prices rise by 0.9%, above market expectations of 0.7%, though still below the previous quarters 1.6%. This pushed the year on year rate up to an elevated 3.6%, well above expectations, and undoing the effects of last weeks note from Westpac which suggested that the next move in rates for the RBA could be lower by the end of this year. This higher than expected number throws the focus back onto the next RBA meeting as speculation of a rate rise moves back onto the agenda, and sends the Australian dollar to new record highs against the US dollar.

In Germany higher prices are also likely to be the centre of attention even though the high value of the euro could well weigh down on imported inflation, with CPI for July expected to remain benign on a monthly basis, at 0.2% and constant at 2.3% on an annualised basis, and throwing into the spotlight the ECBs fixation about an inflation problem that doesnt appear to be there, despite council member Noyers claims to the contrary yesterday. Import prices for June are expected to have slipped back 0.2%.

In the UK the focus remains on the level of growth in the UK economy after yesterdays Q2 GDP figures confounded the Cassandras who thought that the economy would contract. A figure of 0.2% while not exactly pulling up trees was pretty much as expected. Todays CBI industrial orders for July look set to keep the focus on the growth story and are expected to show a contraction to -3 from a figure of 1 in June.

Disappointing Richmond Fed and housing data yesterday keeps the focus on the US economy, with the release of durable goods later this afternoon. While the continued political saga between Democrats and Republicans continues to sew uncertainty into the US economy, the figures could well also disappoint as the bickering continues and the US dollar continues to get caned, especially against the Swiss franc where it once again made fresh lows.

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The dollar fell hard Tuesday after lawmakers failed to make progress on raising the debt ceiling. AUD was the top performer, followed closely by EUR and GBP; NZD and CHF hit records against USD. The focus now shifts to Australia with the critical Q2 inflation report upcoming due at 13:30 GMT (14:30 BST).

US leaders spent the day hardening their positions and progress toward a deal may have even taken a step backwards. 1) Hard-line conservatives in Boehners caucus said they wont support his latest plan. 2) Some commentators noted that Obama omitted his reference to vetoing the House plan to raise the debt ceiling in his speech, saying it might mark progress toward a compromise. That wasnt the case as he reasserted that his veto intentions. 3) The White House confirmed what the market already knew Aug. 2 isnt the real deadline.

We saw several surveys about the debt ceiling and potential fallout. One from Reuters showed 30 of 53 economists saying they expect the US to lose its AAA rating from one of S&P, Moodys or Fitch.

A report by JPMorgan also highlighted the absurdity of US lawmakers arguing over $200-$300 billion in spending cuts over the next decade. They noted that a downgrade will boost Treasury yields 60-70 bps and cost the US roughly $1 trillion over the next 10 years in interest.

Economic data and markets were mixed. The Conference Board's measure of consumer confidence climbed to 59.5 in July from 57.6, beating the 56.0 consensus. The Richmond Fed hit -1 from +3 (+5 expected). Housing metrics were a mild disappointment. The S&P 500 fell 0.4% to 1332. Gold gained $8 to $1622 and silver climbed 56-cents to $40.92. Oil was virtually flat.

The US dollar fell badly across the board on Tuesday and neighbouring CAD was second-worst. Its understandable that CAD has not fully taken part in the USD rout but its somewhat surprising that USD/JPY hasnt declined more deeply. The pair hit a four-month low of 77.81 on Tuesday but if the charade in Washington continues for another 24 hours, its the odds-on favourite to break down, with stops expected below 77.75. We see very little chance of a meaningful intervention to boost USD/JPY from the Japanese government.

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Australian CPI Preview

The major release of the session comes at 0130 GMT as Australia releases Q2 CPI. The headline reading and core (trimmed mean) are both expected up 0.7%. The RBA specifically cited this release as a critical component in determining monetary policy moving forward. The market has backed off expectations from Australian rate hikes this year with the OIS market is now pricing in 42 bps of EASING in the next 12 months. It appears, however, that the RBA would be prepared to hike rates if the CPI reading is very high; i.e. above 1.0% q/q on the trimmed mean.

We think the market is pricing in a reading higher than the consensus after PPI, the import price index and Melborne Institutes inflation expectations gauge all rose above expectations. The all-time high in AUD/USD is 1.1012 and with the pair trading around 1.0950, it wont take much for a breakout.

Following up on yesterdays fresh longs in silver, gold and EURUSD, we bring you the latest trades after all of our euro longs hit their targets. Some have asked how come we issued euro longs and oil shorts. Both trades hit their limits. We add a new silver chart to back our ideas from Monday. And finally, we reconcile our take on S&P500 and the USD to validate our latest trades. DIRECT ACCESS: http://ashraflaidi.com/products/sub01/access/?a=462 NON-SUBSCRIBERS: http://ashraflaidi.com/products/sub01/

AL

FX markets consolidated during the London session after the greenback was sold across the board in Asia. Euro ignores lower German Consumer Climate data and GBP is higher despite poor GDP numbers. Market turns to US consumer confidence & New Home Sales.

USD experienced major weakness during the Asian session as US debt ceiling woes continue with little progress. As long as no deal is announced and USD debt downgrade looms, USD selling is likely to continue. Amid the USD selling frenzy, the NZD and the CHF reached new historical highs above 0.87 and bellow 0.80 respectively.

Sentiment towards the USD is so poor that unless data releases surprise significantly, they play only a minor role. German GfK Consumer Climate for August came out slightly lower at 5.4 from previous 5.5 and second quarter GDP in the UK was in line with expectations at 0.2% but lower from previous 0.5%. On year over year basis UK GDP grew at 0.7%. GBP reacted positively to the GDP data as rumors of extremely weak print were floating around the dealing desks before the release.

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New York session is rich with data today. The S&P/CS Composite House Price Index in May is due at 9:00 am ET and is expected to have decreased by -4.6% from previous -4.0% y/y. The selling price of a single family home has been decreasing gradually since July 2010 and is reaching contraction levels not seen since the beginning of 2010.

July Consumer Confidence data is due at 10:00 am ET and is expected to decrease for the fourth time in a row. The print is expected to decrease to 57.1 from previous 58.5. June New Home Sales are expected to stay in a range seen over the past quarter and the expected print of 321K would be only a slight improvement from previous 319K.

Finally, July Richmond Fed Manufacturing Index is expected to improve again to 5 from 3. In May this index dropped to -6.

As the US economy continues to slow down and the US political bickering goes on, traders may get another reason why to sell the USD. It is hard to imagine that any of these data releases would surprise to the upside.

Sterling in focus ahead of Q2 GDP release as concerns about growth start to weigh, Obama speech sinks the US dollar as US debt ceiling wrangling continues, Swiss franc and gold continue to rise.

For quite some time now the UK chancellors austerity plans have attracted criticism from across the political divide as being too far and too fast, with economists like ex MPC member David Blanchflower claiming that the current governments fiscal policy is a mistake. Notwithstanding the fact that both the OECD and the IMF have broadly backed the plans the recent weakness in economic data has raised the spectre of the possibility that the latest Q2 growth figure could slip into negative territory.

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The usual excuses are already being prepared in the event of a poor number, from the extended Easter break due to the Royal Wedding, to the pinch on consumer spending caused by rising inflationary pressures.

Expectations are for growth in Q2 to rise by 0.2%, less than half of Q1s 0.5% rise, but still in positive territory. Despite the recent volatile nature of the recent retail sales data, recent PMI data suggests that even though growth has been slowing it is just about holding onto positive territory.

Even if growth is on the weak side the Chancellor will still be able to point to the UKs low borrowing costs relative to what is currently going on in Europe and the political wrangling in the US over the raising of the debt ceiling.

Nevertheless a poor GDP number will raise concerns that the UK may not be able to get its deficit down in the timeline originally planned and as such send borrowing costs up on fears that the government may relax the purse strings in an attempt to court popular opinion.

In the US the political wrangling between Democrats and Republicans continues over the raising of the debt ceiling and the uncertainty created by this could well adversely affect this afternoons consumer confidence number for July. Last nights speech by President Obama underlined the fact that the parties remained as far apart as ever, with the two parties putting forward two separate fiscal plans. The Republicans are looking to implement a two step approach in order that they can raise the issue prior to the Presidential re-election campaign in 2012. The Democrat plan seeks to raise the debt ceiling until after the 2012 election in an attempt to alleviate the concerns of the credit ratings agencies who have more or less indicated that the US will lose its AAA rating unless a credible deficit reduction plan is implemented in the coming months.

As a result of the uncertainty the Swiss franc and gold have continued to make record highs against the US dollar and look likely to continue to do so while the current uncertainty prevails.

US dollar didnt get the walloping some expected (or would like) on Monday despite slow progress in debt ceiling talks. The one exception was the Swiss franc which shot higher across the board on risk aversion. Debt ceiling talks will continue to dominate in early Asian trading. More detailed analysis on CHF below.

Two debt ceiling plans were unveiled on Monday: 1) Senate Democrats proposed $2.7 trillion in savings over 10 years with nearly half coming from defense spending cuts. 2) House Republicans called for a two-part plan that would raise the ceiling $1 trillion this year and $1.6 trillion next with even larger spending cuts. The second tranche would require $1.8 trillion in cuts to Social Security, Medicare and other entitlements.

From this it looks like tax hikes (and tax reform) are less likely. Its seems its just a matter of how much to cut and where but Bill Gross prediction that most cuts will be fiction and swamped by lower revenues is already ringing true.

What is also becoming increasingly clear is that this will not be a long-term solution. At best the ceiling will be raised until slightly beyond the 2012 election with very little meaningful reform to entitlements or a credible plan toward a sustainable debt load. This sounds to us like precisely the type of outcome that WILL RESULT IN A DOWNGRADE. If such a deal is announced, we dont expect a downgrade immediately but it will not be advisable to hold USD because a downgrade could be announced at any time. We will have more about the impacts of a downgrade and potential trades in the days ahead.

The dollar would like have fallen farther but the idea that AUG. 2 ISNT THE REAL DEADLINE as taken hold. S&P said the Treasury can stretch out the process beyond Aug. 11. Others say as long as Aug. 15.

Obama is scheduled to speak at 9 p.m. ET (1 a.m. GMT). The chief risk we see here is that Obama abandons his demand that the higher ceiling runs through the 2012 elections. This would probably pave the way for the outline of a deal sometime in the subsequent 48 hours.

Outside of the huge moves in CHF on Monday the forex market was tame. JPY and CAD were mild outperformers with GBP lagging. Gold gapped $14 higher at the open, ran as high as $1621 and closed at $1614. The S&P 500 fell 0.6% to 1337.

Ashraf has six trades open for Premium members and five made gains today. Crude oil shorts are now closed as they hit all targets early in North American trading.

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MORE ON THE SWISS FRANC RALLY

USD/CHF fell as low as 0.8020 on Monday while EUR/CHF remains about 180 pips above the record low of 1.1404.

The reasons for the CHF move: 1) Over the past several weeks some large operations shifted into USD/CHF longs. They were likely stopped out. 2) Technical selling on the break below the record low of 0.8081. 3) The market is pricing in a US downgrade and when the headline hits, the place you want to be is short USD/CHF.

The collision of these three factors today caused an outsized gain in CHF. To us, this move looks like it has gone too far, too fast. Momentum indicators are stretched and consolidation looks more likely in the next few days than declines below 80.00 especially with the risk of a debt deal.

Arabic speakers can watch Ashraf's extensive interview with CNBC Arabia about the intricacies of EURUSD, EURCHF. USDJP, silver and Japan's debt load vs the rest of the world . http://youtu.be/HDl2Sd9UXq0

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Risk currencies are becoming quickly overcrowded and range-bound equity indices remain the territory of traders rather than investors. But silver is once again appears as the notable gainer, characterised by richly similar fundamentals to gold yet is trading at 20% below its record high. See our latest PREMIUM TRADES, including gold, silver, EURUSD, EURGBP and US crude oil,and which ones have avoided the stops. We're also posting our latest chart on silver stochastics and Gold/Silver Ratio: Today's Premium Trades: http://ashraflaidi.com/products/sub01/access/?a=461 To get a trial today, click here: http://ashraflaidi.com/products/sub01/

USD is little changed and trading near Fridays closelevels. The exception is USDCHF that continues to melt down. US debt ceiling stalemate to keepUSD under pressure. Dallas Fed Manufacturing Activity is next.

USD is likely to stay under pressure as market focus turnedfrom the Eurozone periphery debt problem to the US debt ceiling stalemate. Riskaversion that would under normal circumstances support the greenback,underpinned JPY and sent CHF soaring. USDCHF made new historical lows at 0.8020while EURCHF traded down to 1.1530 which is more than 200 points below Fridaysclose.

We can often see markets find a resistance/support at big,round numbers such as 0.8 in USDCHF. Trying to pick bottoms is similar to theproverbial catching of the falling knife but option related buying combinedwith the psychological aspect of round numbers could provide short termsupport.

Over the past two weeks BOJ officials started again to issuestatements regarding JPY strength. Yesterday was not an exception as BOJgovernor stated that JPY rise poses risk to the Japanese economy. Given themassive loss that SNB is keeping on their books after failed interventions near1.50 in EURCHF, BOJ is likely to think twice before devoting a significantcapital to interventions.

On the data front, ItalianConsumer Confidence in July fell to 103.7 from 105.8 in June and UK BBA MortgageApprovals for home purchase increased slightly to 31.7K in June from 30.8K inMay. Despite this increase, year over year data shows a 6% decrease.

There is only one fundamental data release due during the New York session today.At 10:30 am ET DallasFed Manufacturing Activity for July is expected to print -7.2 after dropping to-17.5 a month earlier. Even though this indicator usually does not have muchlasting impact, it confirms the manufacturing slowdown that is taking place notonly in the USbut in most countries around the world.

US politicians remain deadlocked with no deal in sight, Doubts remain about Europes new plan as backlash begins, Moodys downgrades Greece again, Gold prices surge on debt fears, UK house prices, AUD PPI slips back. Our Premium Gold trades from Wednesday have been activated as well as our EUR longs.

The debt ceiling deadlock continued over the weekend with neither Democrats or Republicans prepared to give ground on their respective plans for a rise in the debt ceiling. It now appears that the US is sleepwalking its way to a credit ratings downgrade, with the Republicans pressing ahead with a two tier plan to raise the debt ceiling matched by an equivalent amount of spending cuts over the next 10 years. This would be followed up with further votes on spending reductions further down the line.

Given that Standard and Poors only warned last week that any plans to raise the debt ceiling that werent followed by a serious plan to get the deficit under control, suggests that either politicians arent listening or remain blissfully unaware if the consequences that a downgrade would have.

The US dollar looks increasingly likely to remain under pressure as a result and the resultant effects would likely not be good for the US economy in a week when Q2 GDP is expected to show further evidence of a slow down in the US economy.

Back in Europe German Chancellor Angela Merkel came under fire back in Germany over the weekend as economists and ex Bundesbank officials queued up to have a pop at her over fears that Germanys fiscal sovereignty could be at risk from last weeks deal in Brussels. She wasnt spared either by her ex economic advisor as Bundesbank chief Jens Weidmann weighed in accusing her of exposing Germany to sizeable risks.

Our Premium Gold trades from Wednesday have been activated as well as our EUR longs. The breakdown of US debt negotiations is likely to support our current Premium trades in EURUSD and metals. See our Premium Trades under the latest edition "How high the Euro Now?" http://ashraflaidi.com/products/sub01/access/?a=460 To join: http://ashraflaidi.com/products/sub01/

Even though the deal agreed last week by EU leaders has bought the single currency some time, doubts remain about the risks of contagion with the EFSF changes needing ratification from the 27 member countries parliaments. With the court case about the legality of the EU bailouts still waiting to be heard in the German constitutional court there remain many obstacles to this agreement getting implemented.

There is also the fact that for the EFSF to be taken seriously it would need firepower of up to 2trn to be effective, which it currently does not have.

Ratings agency Moodys this morning downgraded Greeces sovereign rating once more, this time to Ca with a developing outlook, citing the likelihood that private creditors will incur substantial economic losses on their holdings of government debt.

UK house prices fell for third month in July and are likely to continue on their recent downward trend, Hometrack says as prices fell 0.1% in July, and 3.9% year on year.

Inflationary pressures appear to be slipping back in Australia after Australian producer prices for the quarter rose at a slower pace of 0.8% from 1.2% the previous month, reinforcing perceptions that interest rates may not need to rise in the near future.

Gold has surged overnight hitting new record highs as US debt fears continue to see safe haven flows pour into John Maynard Keynes barbaric relic