THE BIG PICTURE
The US Senate Monday night neared the completion of a bipartisan deal to raise the debt ceiling and end the government shutdown. The plan reportedly would lift the debt limit through Feb. 7, finance the government through Jan. 15 and conclude formal discussions on a long-term tax and spending plan no later than Dec. 13. But it was already clear that the most conservative Republican members of the House of Representatives were not going to agree to the bill. Given their opposition, the leadership of the House of Representatives might not even bring the bill up for a vote, because so far they have pledged not to bring to a vote any bill that cannot be passed with a Republican majority. If they do decide to bring it to a vote and pass it with the support of the Democrats, it could be a defining moment in US politics that splits the Republican Party.
As for the FX market, the reaction was as one might expect: the safe-haven currencies, JPY and CHF, weakened vs USD while the high-beta currencies gained, AUD most of all followed by NZD, NOK and CAD. EUR, GBP and SEK were largely stable. Gold and silver were slightly higher than they were yesterday morning at this time, but well off their late European highs, which were hit when it looked doubtful whether an agreement could be reached. Although the Senate is showing some progress, it’s by no means guaranteed that this plan gets through the recalcitrant House and hence the “risk on” trade remains risky. And even if the bill does eventually succeed, the market is just getting set up for a repeat showdown next January/February. I think the T-bill market is likely to retain a risk premium and hence the dollar is likely to remain under a cloud until then, while the safe haven currencies are likely to remain stronger than they would otherwise have been.
The focus in Europe will be on the ZEW survey for October. The current situation index is expected to rise to 31.3 from 30.6 in October, while the expectations index is expected to remain unchanged at 49.6. Last month the ZEW index was better than expected but it had no lasting impact on EUR/USD. In the UK, CPI as well as PPI for September will be released. CPI is expected to be slightly lower on a mom basis (0.3% mom from 0.4% mom), which would bring the yoy rate down slightly to 2.6% from 2.7%. This is still well above the Bank of England’s 2% target but certainly the direction is correct. The Output PPI is forecast to be up a modest 0.1% mom, the same rise as in August. In the US, Empire manufacturing for October is expected to rise slightly to 7.00 from 6.29, but who knows if anyone cares about US indicators for the time being. As for speakers, European Union finance ministers meet in Luxemburg for an EcoFin meeting. BoE’s Weale speaks at UK Parliament Treasury Committee while ECB’s Praet speaks in Munich. Finally, New York Fed President Dudley will be speaking at a Bank of Mexico conference in Mexico, while Federal Reserve Chairman Ben Bernanke will address the same conference by video.
EUR/USD managed to break above the upper boundary of the short term purple channel during yesterday’s European day, but started moving lower as New York trading got under way and is currently testing the boundary as a support. A rebound at that level would probably extend the movement towards the short-term highs at 1.3644 (R2). However, our oscillators remain below their trend lines, with RSI testing its trend line and moving lower. A rebound should be accompanied with the break of the oscillators above their trend lines to confirm the upward trend. Without that confirmation, we remain neutral on the direction.
Support: 1.3461 (S1), 1.3400 (S2), 1.3324 (S3)
Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
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