Political uncertainty in US continues as key data releases continue to be delayed

Tom Tong08/Oct/2013Currency Updates

GBP

Sterling rose against a weaker U.S dollar as the political fever over the U.S partial government shutdown and all important debt ceiling showed little hints of a cure. The political doctors at the White House now have to heal the disease until the situation turns potentially fatal. The stock and currency markets are naturally nursing massive concerns over the ongoing uncertainty, the closer we draw to October 17th the jumpier the situation will become.

Although the pound was punching above the dollar the bell was nowhere near ringing at the nine month high hit last Tuesday, many feel the pound is still punching above it’s weight and once America is fighting fit we will see a decline in Sterling performance against the greenback.

Sterling was also firmer against the Euro. The Euro peaks hit last weak followed strong Eurozone data and ECB confirmation that QE will continue for the foreseeable future. After this brief rally, trading has retraced to normal levels and further movement will stem from developments in the U.S and further micro and macro data out of the Eurozone.

Market chatter continues to ring with praise for the U.K recovery. The bullish sentiment was reinforced last week via PMI surveys on manufacturing, services and construction all producing strong results. The pound will continue to be well supported across the board until data disproves the apparent growing strength of the U.K recovery. Yesterday also saw the release of employment data for the financial services industry. It is now hiring at its fastest pace since the crisis. From bankers to bricklayers the U.K job market is performing well. Currently unemployment is 7.7% down from 7.9% this time last year. If growth is maintained by year end we will expect U.K growth to come in at 2 – 4%.

The ongoing recovery has prompted investors to start pricing in a potential BOE rate hike by the first half of 2015. This will be the first stage of reduction in QE. If so the BOE will have underestimated the fortitude of the U.K economy as it expects a rate hike in late 2016 as this is when they feel unemployment will have dipped to 7% therefore resulting in a probable rate hike and QE reduction. The central bank meets this week although it is not expected to pull any surprises given the consistent growth and a traditional desire to not rock the boat. A trend of future growth is widely expected, this means inflation expectations remain elevated, consequently lowering the risk for the BOE to turn dovish any time soon.

Data releases of note for the U.K today include Shop price index.

EUR

The Euro lost gains against Sterling yesterday following last weeks rally stimulated by the ECB meeting in Paris.

The Euro also lost gains against the dollar as the U.S political situation continues to escalate.

Overall the market is expecting further gains for the Euro, admittedly it’s chequered past has always caused some to view it with suspicion, however Draghi has been a calming force and his promise made last year to save and strengthen the euro at all costs has proved to be true. His clear forward guidance last week also stemmed concerns that a snap change in policy from the ECB concerning there recovery measures and Q.E program is unlikely. The ECB will continue to pump cheap money into the Eurozone to encourage borrowing and stimulate growth. Although pleased with the Eurozone performance Draghi stressed that the recovery is still fragile and requires delicate handling.

This is a contrast from the ECB stance last February during which the currency was enjoying similar levels of strength. At this time the ECB expressed concern over the FX cooling impact on growth and pricing, this time round there was no such point raised and no insinuation that Euro performance was harming economic activity. However last time round the ECB was battling a upward trend in money market rates coupled with poor recovery data. The reverse is now true with a downward trend in money market rates and stronger growth data therefore minimising fears that tighter control is necessary to stimulate growth. Ultimately it is the decline in money market rates that made Draghi less aggressive. With lending cheap and it appearing to stimulate growth across the economy during what is a volatile time for global markets, it is understandable that he would not look to alter the current ECB approach to the recovery.

The Eurozone looks close to registering its second quarter running of minimal but solid growth. Italian politics has calmed, Ireland is strengthening and even Greece is improving. When this is compared to the situation in the U.S the Euro begins to look attractive as a safe haven currency and capital flight recently has seen investors dumping dollars and U.S stocks, preferring to invest in the Eurozone. The Euro on a trade weighted basis is already at a 2 year high.

There is a strong bias of further Euro gains across the board pending the development of the government shut-down in the U.S and continual data out of the Eurozone.

Data releases of note for the Eurozone today include German trade balance and current account status and factory orders. Also French Trade balance and imports and exports. Also Spanish Industrial output.

USD

The past week was one all Americans would rather forget, however the harsh reality of a partial government shut down is still in play. The politicians seem to be exhibiting little progress with both sides still refusing to blink. Last weeks shut down and delayed NFP had a negative effect on the markets ability to gauge the volatility of the U.S. This week will see more hearsay and uncertainty. Few feel the U.S will default on it’s debt however progress is slow. The public are outraged and the market is nervy,it would be incredibly bold to dive into any short term investment in the U.S with the current levels of uncertainty. Markets seem to have expected some weekend political progress, however a resolution is clearly still a long way off. The deadlock is expected to continue at the very least into next week.

The Dollar has fallen against a basket of it’s most traded currencies alongside perceived safer currencies. U.S stocks are also performing poorly with the DOW down 136.34 points and the S+P 500 14.38. In both stocks and currencies investors and traders seem to be selling until a agreement is reached, at present it is impossible to know how far the Dollar and U.S stocks will fall in the short term. On the flip side for those bolder investors now is seen as a perfect time to take a long bullish view on both the Dollar and U.S stocks, indeed some in the market are delighted at the fall and are buying up stocks and currency with glee.

The majority feel Congress needs to increase the $16.7 trillion borrowing limit by October 17 or a default is highly probable. If Congress continues to drag out a solution, anxiety levels will ratchet up quickly.

As of this morning The U.S government wallet has $30 billion cash in hand. A default on debts due will have a extensive ripple effect since Treasury securities not only provide reference rates for nationwide lending, additionally they end up in other financial instruments. Empty U.S pockets could trigger defaults in major U.S bonds alongside further derivatives.

A $120 B Treasury Bill is due to mature on October 17th with another due on October 24th. The timing of this is key for the overall process since if these are missed the already low confidence levels in the U.S economy will crumble. Ultimately the U.S government is the main source of liquidity for the U.S market. If the government defaults on debts due and fails to reach a solution on the debt ceiling the already low levels of confidence in the U.S economy will crumble therefore sending global markets into a savage spin.

Data of note out of the U.S today is Redbook Chain store sales, also NFIB small business survey. International trade deficit figures were due for release however they have been cancelled.

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Written by Tom Tong

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