US budget groundhog day


Idea of the Day

We wrote yesterday about the fading post-Fed party, looking more from the performance of ‘risk assets’ in general. But there is also the dollar angle, with the dollar index having risen every day since the Fed decision to retrace around 1/3 of the initial losses. There are a number of factors at play here, but once again there is the looming issue of the US debt ceiling. We’ve been here before, back in the summer of 2011 (and several times before then), when US politicians took negotiations right to the wire. The Senate is set to hold a vote today on legislation passed by the House of Representatives to cover spending to the middle of December. Last time, the dollar’s haven appeal won out over any investor concerns regarding US fiscal sustainability and the same is likely to happen again this time around. The continued prospect of Fed tapering, even though we may not be there yet, will still provide a supportive backdrop.

20130925 Table

Data/Event Risks

USD: Durable goods data will be the usual roller-coaster of data volatility, but it’s not usually sustained in terms of market volatility. New home sales are seen partially bouncing back (by 6.6%) from the July weakness, but again also a volatile number and often brushed aside by the dollar.

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EUR: As well as the generally firmer dollar, there was more talk yesterday of liquidity operations from the ECB to counteract the contraction of its balance sheet. This is happening as banks re-pay longer-term loans back to the ECB. All else equal, this is euro positive, so prospect of more cheap loans is seen as pushing the euro lower.

JPY: The yen is the only currency on the majors that has managed to outperform the dollar over the past week, since the Fed’s non-tapering decision. EURJPY looking interesting should this continue, with trendline support currently coming in at 131.23.

AUD: Another currency feeling a little heavy post-Fed, with AUDUSD having retraced the entire move seen a week ago.

Further reading:

EUR/USD September 25 – Little Movement as Markets Await US Housing, Mfg. Data

NZD/USD continues falling after the big trade deficit

Get the 5 most predictable currency pairs

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