THE BIG PICTURE
US debt talks in disarray, but not USD With less than 48 hours left to go before the US runs out of money, the government is still unable to come to any agreement on how to avert default. “Debt Talks in Disarray as House Balks,” is the headline in the New York Times. The Senate is working on a plan, but the House Republicans couldn’t even agree on a deal that would be unacceptable to the Democrats and President Obama, much less one that would pass. “The House’s hard-core conservatives and some more pragmatic Republicans were nearing open revolt,” according to the Times. Short-term T-bill rates soared as the market prepared for a default. Yesterday’s auction of 3- and 6-month bills drew extremely weak demand as Fitch Ratings put the US on “rating watch negative” over its AAA rating, meaning it could decide to downgrade the US sometime before the end of next March. (S&P has already downgraded the US.) Yet oddly enough, the dollar was higher against almost all G10 currencies and the majority of EM currencies that we follow, too. To add to the puzzle, the Empire State manufacturing survey fell -4.8 points to the lowest level since May, and Dallas Fed President Fisher said that it was “too tender a moment” to trim QE this month. But with the debt ceiling now just being pushed out to next February, that comment implies the Fed might not even be able to begin tapering before next March.
Much of the dollar’s gains occurred yesterday following the better-than-expected ZEW survey, which boosted thoughts of global growth and caused an outflow out of CHF. It was noticeable though that the drama in Washington failed to erode those gains entirely. That raises an interesting point: in case the US does default, will the dollar be the beneficiary? That is, while a US default certainly won’t be good for the US, it won’t be good for any other country, either. Swiss banks for example hold huge amounts of US bonds (equivalent to some 20% of Swiss GDP). So in case of financial Armageddon, where do you hide? If we look at the 2008 financial collapse, the US turned out to be the safe haven of last resort even though the US was also the source of the problems. The lack of any disruption to the long end of the US bond market – in contrast to the gyrations in the T-bill market – suggest that even in case of a default, the US Treasury market could still be the global bolt hole. That means the dollar could actually benefit (in the short term, at least) if the US government proves incapable of reaching an agreement today.
Today’s Treasury auction will be a big focus of interest, especially the $20bn in one-month T-bills. Will anyone want to buy bills that might not be redeemed on schedule? Also in the US, the National Association of Homebuilders’ housing market index is expected to have fallen 1 point to 57 in October, which would still be a relatively high level. Also, the Fed releases the Beige Book. Here in Europe, the focus of attention today will be on the UK employment data for August. The unemployment rate is expected to remain unchanged at 7.7%, while the jobless claims change for September is expected to fall by -25.0k from -32.6 the previous month and -36.30 in July. The figure will be closely watched as the Bank of England has made a decline in unemployment to 7.0% a prerequisite for raising interest rates. Later in the day, the final figure for the Eurozone CPI for September is coming out which no change is expected (1.1% yoy). As for speakers, ECB President Draghi speaks in Frankfurt while ECB’s Mersch speaks in Luxembourg.
EUR/USD moved lower, breaking once more below the 1.3564 barrier. The pair seems to consolidate in a symmetrical triangle formation. A clear break outside the pattern should enforce the pair’s new directional movement.. The picture is mixed since our oscillators indicate decreasing momentum, but the 50-period moving average remains above the 200- period moving average. As a result, I consider the bias of the pair to be neutral, until the clear escape of the triangle occurs.
Support: 1.3461 (S1), 1.3400 (S2), 1.3323 (S3)
Resistance: 1.3564 (R1), 1.3644 (R2), 1.3706 (R3).
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