The brinksmanship in Washington continues as House majority leader John Boehner said that he doesn’t have the votes to pass a budget or raise the debt ceiling without concession from the Democrats on the health care bill. It certainly looks like this will drag on to the supposed “deadline” on the debt limit, which US Treasury Secretary Lew has declared as October 17. I won’t be shocked if we end up with some temporary stay spending authorization bill that keeps the uncertainty alive for weeks to come.
Meanwhile, we saw an interesting conclusion to the week in many of the major USD pairs. The biggest mover on Friday was GBPUSD, which continued to reverse lower, a powerful technical signal that the recent rally extension was a bridge too far. EURUSD was also interesting after Thursday’s rally to new highs since early February yielded to Friday’s selloff back into the range. USDCHF posted a similar reversal around the critical 0.9000 level – which has been in play on several occasions stretching back almost two years. Obviously, this is a critical area for the greenback.
USDJPY is doing its own thing in falling while the dollar was generally strong elsewhere, though as I noted late last week, the selloff has been rather halting and quiet considering the technical levels we have taken out, so I’m hesitant to commit too strongly to a short-term downside view. In other words, it would have made more technical sense for USDJPY to sell-off more steeply as various levels fell on the way down and that this is not happening must give us a bit of pause. Still, the pair looks technically weak until proven otherwise. The big resistance zone is now 97.50/98.00 and I would expect a general correlation with risk appetite for the pair.
New Zealand’s Finance Minister Bill English was complaining about the kiwi’s strength, but rate expectations and the global risk environment are going to do a lot more heavy lifting than anything the government says. New Zealand year-forward rate expectations have come off about 25 bps over the last three weeks, though hardly anything has happened over the last two weeks in terms of Reserve Bank of New Zealand expectations. NZD should be one of the most vulnerable of the G10 currencies in the event that the risk-off theme deepens here.
Chart: EURUSD
An interesting small reversal on Friday in EURUSD as the new highs didn’t hold, but we can see that the pair needs to take out 1.3460/50 before the rally looks threatened. It will be interesting to see if Euro can maintain a preferred status if risk appetite comes under real pressure in the days ahead – considering the large EURUSD longs out there, I would expect that eventually the USD becomes the preferred currency if the fear/deleveraging ratchets higher from here.
Looking ahead
The situation with US economic data remains confusing. If the shutdown remains in effect all week, we can expect no trade balance release tomorrow, but we can expect the Federal Open Market Committee minutes on Wednesday and weekly jobless claims on Thursday. Other data that won’t be released this week in the event of a continued shutdown includes the Retail Sales report on Friday. It remains uncertain when the September payrolls report (the one scheduled for last Friday) will be released and the US Bureau of Labor Statistics (responsible for payrolls, CPI, and PPI) isn’t even collecting data while the shutdown continues, so we can expect repercussion for October and possibly even November data if this continues.
Note the heavy calendar in Asia tonight and that there is far less pep in AUDUSD’s step now that the Friday rally has been largely reversed. The confirmation zone of AUDUSD weakness is coming up below 0.9300.
Stay careful out there – volatility can become far more pronounced in this environment.
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