(As written for My Paper on 2 August 2011. Click here to enlarge)

I was in Kuala Lumpur last week to speak in the International Rubber Conference 2011. Part of my message centered on how the US would increase its debt ceiling before the dreaded deadline of 2^nd August.

The whole of last week had the world riveted on the U.S. because it seemed that U.S. policymakers were caught in a deadlock, with no credible plan in sight. This was primarily because the Republicans had insisted on deep spending cuts before they would consider raising the USD14.3 trillion limit on U.S. borrowing.

Yesterday however, the markets heaved a sigh of relief when the US finally revealed that an agreement had been reached. “The leaders of both parties in both chambers have reached an agreement that will reduce the deficit and avoid default,” President Obama said at the White House.

In terms of avoiding default, the plan is to raise the debt ceiling by at least USD2.1 trillion. This would be sufficient to serve the nations needs into 2013.

In terms of reducing the deficit, the plan has a two-step process.

Firstly, it involves about USD900 billion in spending cuts over the next decade. Secondly, it involves USD1.5 trillion in savings, which must be found by a special congressional committee. Congress must act by December 23, 2011, under the deal.

If the special committee fails to yield at least USD1.2 trillion in debt reduction, sweeping automatic spending cuts would go into effect. These would include cuts in defense programs and Medicare.

While this plan does seem like good news for the U.S. at least for now, the bad news is that Standard & Poor’s, one of the world’s leading rating agencies, could still downgrade the current AAA rating of U.S. debt.

The S&P, which has given the U.S. a top AAA ranking since 1941, had mentioned last month that a reduction could occur as soon as August if there wasn’t a “credible” plan to reduce the nation’s deficit. A credit downgrade would undermine confidence in U.S. solvency and send negative ripples throughout the international financial system.

All eyes will be on the rating agency this week as it reviews the agreement and decides what to do.

At the time of this writing, the deal has not been voted on. However, I do expect the deal to pass in both the House and Senate.

Top News This Week

USA Non-Farm Payrolls. Friday, 5th August 2011, 8.30pm. I expect figures to come in above 80K (previous figure was 18K).

Trade Call

Sell EUR/USD at 1.4350

On the hourly chart, EUR/USD is moving in an expanded range. With the upcoming vote to increase the U.S. debt ceiling, the US dollar is expected to rally for a while. Additionally, a classic head and shoulders pattern is spotted which is a strong sign of an impending reversal of price.

A short is taken once prices drop to 1.4350. A protective stop of 60 pips is placed above the entry price, and we will have 2 profit targets on this trade.

Entry Price = 1.4350
Stop Loss = 1.4410
1st Profit = 1.4300
2nd Profit = 1.4250