THE BIG PICTURE
Is motion the same as change? The House Republicans proposed extending the debt ceiling bysix week, which raised hopes about a possible solution, albeit only a temporary one and one that did not resolve the government shut-down. Although in the event no agreement was reached, stocks soared 2.2% and the VIX index collapsed over 3 points to 16.5, while in the T-bill market, yields plunged by 10 bps at one point (although they rose again later in the day and are now above yesterday morning’s levels in early European trading). The relief rally in FX was not in the dollar however as the US currency fell against most other currencies. The high-beta AUD and CAD were the biggest winners but GBP also continued to claw back some of its losses from Wednesday’s disappointing industrial production figures. SEK and NOK continued to weaken, but the main loser over the day was JPY as USD/JPY as usual moved higher in tandem with the TOPIX (a 65% correlation on a weekly basis over the last year). CHF, the other safe-haven currency, was slightly higher however.
As far as I can tell, the House Republican leadership is looking for some face-saving way of averting a debt crisis that will not give the right wing of their party ammunition for a challenge in the primaries that they “caved” or even “compromised.” I’m not sure any such solution is possible that will also meet the requirements of the Senate Democrats without employing or other imaginary numbers. Thus I expect the drama to continue down to the wire next Thursday (at least) and for this strength in the commodity currencies to reverse as investors’ steady faith in the US political system starts to waver.
This morning in Europe the final figures for September German and Italy CPI will be released; no changes to the initial estimates are expected. In the US, U of Michigan preliminary consumer sentiment index for October is expected to fall to 75.9 from 77.5; given what’s going on in Washington, a fall in consumer sentiment would hardly surprise anyone. Canada’s September unemployment rate is expected to remain unchanged at 7.1%, while employment is forecast to rise by 10.0k, far below August’s 59.2k. A large number of central bankers will be speaking at the Institute of International Finance (IIF) annual meeting Friday and Saturday in Washington. Speakers include ECB’s Praet, Asmussen and Coeure, BoJ’s Kuroda (whose speech overnight broke no new ground in its explanations of Japanese monetary policy) Eurogroup’s Dijesselbloem, EU’s Olli Rehn, BoE Governor Tucker and RBI Governor Rajan.
EUR/USD rebounded from the blue support line and moved higher. During the early European session, the pair is heading towards the key ceiling at 1.3564 (R1) and the upper boundary of the purple downward sloping channel. I expect the bears to give their battle near that level, and if they manage to resist, the price will continue moving in the purple channel, which is its short-term path. As long as the previous top holds, the purple channel is considered valid, since the rate is printing lower highs and lower lows.. Both oscillators remain below their blue lines, confirming the negative momentum of the pair. However, the 50-period moving average remains above the 200-moving average, thus, for the time being I consider the downward slope as a correction of the 6th Sept. – 3rd Oct. upward move.
Support: 1.3461 (S1), 1.3400 (S2), 1.3324(S3)
Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
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