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Weekly Fundamental FX Preview – Commodity Headwinds, Greece, and US Budget Talks

The decline in commodity prices has begun to make headlines after the IEA’s release of strategic reserves shocked the crude oil market while dragging spot crude oil prices lower by 4.6% on Thursday. Could additional weakness in commodity prices be on the way following the declines during the months of April and May? After the recent downturn in US data growth factors face major headwinds. Therefore the economic data releases from the G7 nations this coming week may carry further significance.

Greece will also be a headline for next week as the next austerity vote is scheduled for Tuesday. Last week George Papandreou survived a no confidence vote by only 5 voices as the vote was split down party lines. Given the potentially negative effects the austerity measures may have on Greek society as a whole, the next vote may prove to be more challenging as Papandreou will face harsh criticism from both the political opposition his own PASOK party and Greek protesters.

Key to the Greek situation is a plan for a voluntary debt roll over in return for the second Greek bailout. EU/IMF authorities face a formidable challenge to convince a number of parties to come aboard. How officials will entice private holders of Greek debt has yet to be unveiled. Rating agencies have taken a firm stance against any restructuring and have pledged to classify an increase in maturity lengths as a credit event. The ECB is also not yet onboard and has refused to allow restructured Greek debt to be used in its liquidity provisions.

US budget talks are beginning to heat up following the Republican decision to walk out of talks with Democrats on Thursday. This may set up a final confrontation to be hashed out by the key players of the political parties; President Obama and Republican leaders John Boehner and Eric Cantor. The parties have until August 2nd to raise the debt ceiling or face the possibility of a US default. The rating agencies have previously warned on this deadline. Given the headwinds the US economy faces and the potential for political gridlock could the euro benefit from its recent safe haven status despite the obvious flaws the currency currently faces?

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Russell Glaser



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.