Major US indices were lower on Tuesday, extending to the downside through the session, as debt limit negotiations extend further to the edge after little progress was made in further talks between the White House and Republican negotiators. The Nasdaq slumped 160 points 1.26% as the risk off tone and tightening economic conditions hit growth stocks particularly.

Positive economic releases (though hardly top tier) from the Flash PMI’s and a rise in new home sales were firmly in the background of the debt ceiling elephant in the room which looks set to be the main driver of risk sentiment until a deal is done, with both sides in US politics seemingly far apart on this, risk sentiment is looking to be shaky for the near term at least.

FX markets

USD saw gains on Tuesday with a risk off tone in US equities helping The Dollar Index hit a high of 103.65 to test the resistance at last week’s highs. Yields were lower on the session paring earlier strength which did limit gains, a lack of Fed speakers also failed to give any other catalyst.

JPY managed to buck the trend and saw marginal gains vs the USD. USDJPY trading up to 138.91 early in the session before hitting resistance, the Yen finding support as a haven as the risk tone soured , also helped by US Treasury yields grinding lower throughout the US afternoon.

NZD and AUD saw weakness due to the risk tone with AUDUSD testing 0.6600 from highs of 0.6661 as risk sentiment remained downbeat, weaker iron ore and copper prices also hindered the Aussie. A key risk Wednesday is the RBNZ rate decision, where the bank is expected to hike by another 25bp but futures are pricing in a decent chance of a 50bp hike, NZD should see some volatility either way the bank goes.

In today’s economic announcements, the major risk event will be the RBNZ rate announcement at 12:00pm AEST. This is going to be an interesting decision with the markets fully pricing in a 25bp hike, and around 40% on top of a 50bp hike. (35bp priced in by futures markets) The recent NZ budget where large spending measures were announced and seen as inflationary certainly gives the RBNZ to plow ahead with it’s rate tightening cycle, the question is, will they surprise markets with another supersized 50 or be satisfied with a 25, either way there is sure to be volatility in NZD at this time as markets reprice, one chart to watch is AUDNZD where current pricing puts it squarely in the historical buy zone, a “dovish” 25 should see a good mean reversion trade opportunity.

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