Hopes rise of end to U.S crisis seeing US stocks picking up while USD still trading down against both EUR and GBP

Tom Tong15/Oct/2013Currency Updates

GBP

Sterling stepped into the ring against a weakened dollar as the rounds over the past 2 weeks have left the greenback punching below fighting weight. Sterling rose against the dollar, with the FTSE also enjoying gains as the expectation of a U.S resolution continues to gain momentum. Presently the majority of investors are still shying from the dollar as the playground tactics in U.S politics continue. The partial shutdown is grinding on as the world watches, and we creep dangerously closer to Thursday’s debt default.

Trading volumes were skinny across the board as the U.S and Tokyo were partially shut for holiday.

Sterling traded flat against the euro. The common currency remained reasonably close to the 6-week high hit on Friday. This stems from last week’s surprisingly disappointing figures out of the U.K, which raised concern that the recovery and economic growth may be experiencing slower growth than previously thought.

British CPI inflation report will be released today and will be heavily scrutinised. The big news comes on Wednesday with unemployment data for August due for release. Unemployment figures of 7.7% on the nose are widely called.

With QE running in parallel to the desired drop of unemployment levels to 7% any disparity will see markets altering the priced in dates for a change in interest rates and Sterling movement across the board will result. Furthermore, this will be a big week in terms of macro data out of the U.K. However, sterling will be slow dancing to the soundtrack of the U.S default, with any significant movement relating to a development in the situation.

EUR

The euro continues to leverage the U.S crisis and last week’s poor U.K data to it’s advantage. As theses situations are a stark contrast to the recent flow of strong data out of the eurozone, notable gains have therefore been enjoyed over the past weeks. The euro is also gaining from capital flight as investors dump U.S stocks and hot money floats across the Atlantic to hit European shores and stocks. The ECB President Mario Draghi is viewed with confidence by most in the market. His overall calm performance at last week’s ECB meeting has acquiesced those who felt a taper in QE was possible. Perversely his clear forward guidance stating the recovery was still very much fragile buoyed the currency. Ultimately the banks will continue to lend huge amounts cheaply to businesses, thus stimulating growth. For the moment the disparity between the growth of the stronger economies- Germany, France, compared to the still struggling weaker economies- Greece, Spain ,is being shrugged off by traders. In other news Ireland has announced that its bailout will end in December. Recent data releases are encouraging and the economy is now expected to grow at a reasonable pace.

The euro still hovers near the 6-week highs it gained against sterling last week.

It continues to gain against the dollar. However, this could quickly snap back if the partial shutdown in the U.S is sorted, which the market inevitably feels will happen before Thursday as the U.S has been in this situation before and the White House always seems to have a card up it’s sleeve.

Data releases of note out of the eurozone today include French CPI and German Import price index.

USD

The continual U.S partial shutdown continues to punish the dollar. The greenback was down against both sterling and the euro. However, U.S stocks lifted in the face of a likely resolution to the debt crisis. The DOW, NASDAQ and S+P 500 all spiked.

The vultures are still circling the White House, however it looks more and more like the American Eagle will force them to flee with a last minute deal sweeping in. Overall hopes of a resolution continue to gain strength. It looks as though the Senate will pass a bill today or on Wednesday to re-open the government through the end of the year, pending a budget deal, and to raise the debt ceiling, through the end of January or perhaps slightly further. Media reports suggest the bill will pass with at least some Republican votes. If all goes according to plan, that will increase the pressure on House Speaker Boehner to bring the bill onto the floor of the House for a vote Thursday, the first date on which the Treasury, in theory, cannot be sure it can pay all its bills. For the Speaker, the basic problem has not changed. A significant number of Tea Party sympathisers in the Republican camp will not vote for the Senate bill, because it does not defund Obamacare and it raises the debt ceiling. That means the bill can only pass if at least some non-Tea Party Republicans vote with Democrats, thereby inviting charges of treason from the Tea Party on the eve of the primaries, ahead of the 2014 mid-term elections.

The Tea Party is not to be underestimated and from humble beginnings has gained notable power within the Senate and House of Representatives. None of this has changed since the shutdown began, but what is different now is the intensity of the pressure on the speaker from big business and a enraged public to end the shutdown. The easiest way to do this would be to pollute the tea party however this will provoke further anger and disillusion at U.S politics, the last thing politicians want at such a fragile time.

The longer the government shutdown and uncertainty over the ultimate outcome of the debt ceiling squabble continues, the bigger impact on the real economy and the slower eventual rebound. At the end of the third quarter, real momentum seemed to be building in an array of labour market indicators, with the claims numbers clearly pointing to better times ahead. Now, the market widely feels payroll gains will not return to the 200K plus mark needed to signify a real improvement in conditions until early next year. As a full solution to U.S fiscal policy requires far more than a initial agreement on the debt ceiling, uncertainty over investment in the U.S will linger for some time. U.S growth for the 4th quarter is therefore thrown into jeopardy. Labour market and wider economic growth is now called at 0-1% Without the debt ceiling, growth of over 1% was widely expected.

The FOMC is almost certain to hold this view which will therefore mean that we will not see tapering until towards the very end of the year. The continual QE will be a relief for both the greenback and U.S stocks. Any alteration in QE considering the current situation would be reckless.

Data releases of note out of the U.S today include Mortgage Applications and the FED beige book. Mortgage Applications dipped last week and the data is expected fairly flat. The FED beige book is expected to be mixed with manufacturing doing well. However, the housing market has dipped due to higher rates. All eyes and ears are still firmly on the White House.

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Written by Tom Tong

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