90 seconds at 9 am with BNZ: US government nearer default as political impasse deepens, but market reaction subdued for now; IMF warns America

Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news that America's politicians remain at loggerheads on how to increase the US government's debt ceiling from US$14.3 trillion and avoid default by August 2.

The clock is ticking now with little time left for legislators to push through any solution before August 2.

There are currently two plans doing the rounds in Washington. One is from the Republican-controlled lower house of representatives and would involve a two step process of debt ceiling increases that saw US President Barack Obama having to ask for a second debt ceiling increase next year before Presidential elections. 

A Democratic-led Senate plan plan proposes US$2.7 trillion of budget cuts and no need for another debt ceiling increase before the 2012 Presidential elections. See more here at Reuters on the competing plans.

Financial markets are becoming more nervous about the lack of a political deal, although the reaction overnight to the weekend failure to find a plan was relatively subdued.

The gold price rose to a record high above US$1,620 as investors sought a safe haven that wasn't either US dollars, US Treasury bonds or Euros. See more here at Reuters on the rise in the gold price.

The Swiss Franc also hit a record high vs the US dollar. See more here at Reuters on the US dollar's fall against the Swiss franc.

But the market reaction wasn't as severe as some had predicted. US stocks were down less than 1% in late trade and the 30 year US Treasury bond yield rose just 6 basis points to 4.32%.

The US 10 year yield rose 4 basis points to 3%. However, prices for US Credit Default Swaps, which are a type of insurance against a sovereign default, rose to a five month high of 56 basis points, which is just below the level seen recently for the risk of a New Zealand default.  See more here at Bloomberg on US Treasury market reaction.

Some believe America can juggle its finances beyond August 2 even if it can't raise its debt ceiling. See more here at Bloomberg from Wells Fargo on how America could avoid default until September.

However, Standard and Poor's reiterated again its warning that it may downgrade America's AAA credit rating even if a last minute deal to nudge up the ceiling is achieved. That has the potential to nudge up interest rates globally because US interest rates have traditionally been the base for all interest rates.

Meanwhile, the International Monetary Fund warned America overnight to find a comprehensive plan to reduce its budget deficit and increase its debt ceiling to avoid a financial meltdown and global economic slowdown. See more here at BBC.

Also, Moody's downgraded Greece's credit rating further into junk territory and warned it was almost certainly going to judge Greece in default, but Greek banks were unconcerned given they were bailed out last week. See more here at Reuters.

The New Zealand dollar remains just below its 86.7 USc record high this and crept over the 74 mark on the Trade Weighted Index. The last time the Reserve Bank intervened to drag the New Zealand dollar lower in 2007 the currency rose to 77 on the TWI.

Bloomberg noted in this article the reduced correlation between the Australian and New Zealand dollars and commodity prices in recent months as investors sought safe and liquid havens away from Europe and America.

The correlation between New Zealand’s currency, known as the kiwi for the flightless bird on the nation’s dollar coin, and the Thomson Reuters/Jefferies CRB index of 19 raw materials has fallen to 0.346 from a peak of 0.626 in March 2010, according to data compiled by Bloomberg. It’s 0.508 for Australia, compared with a record 0.718 in October 2009, the data show. A value of 1 would mean they move in lock step.