Despite important political news from the US and Japan, a rare miss in UK economic data, and a hawkish statement from the RBA, price action in the dollar and other major currencies was surprisingly muted.
With the US government shutdown, a new tax hike in Japan, a hawkish monthly statement from the Reserve Bank of Australia (RBA), and the miss in UK PMI manufacturing data, it has been an extraordinarily busy night in FX. However, the torrent of news flow has not translated into much price movement in the currency market, and the US dollar (USD) was trading only mildly lower by mid-morning London dealing.
The impact of the US government shutdown was relatively muted in both equity and currency markets, although EURUSD did climb to fresh monthly highs at 1.3588, but ultimately failed to clear the 1.3600 level after German manufacturing PMI printed at 51.1 versus 51.3 expected, but perhaps most worrisome was the sharp rise in unemployment.
German unemployment rose by 25K versus -5K forecast, suggesting that the labor market in the Eurozone's largest economy is no longer growing. This was the second consecutive monthly increase in joblessness in Germany, which bodes badly for Eurozone growth, especially as the country remains in political limbo.
Japan Announces Consumption Tax Hike
In Japan, much-stronger-than-expected Tankan data, which saw the index rise to 12 from 7 forecast, helped convince Prime Minister Shinzo Abe to proceed with the hike in the national sales tax to 8%. The move initially strengthened the Japanese yen (JPY) on fears that it would be contractionary, but Japanese policymakers have made it clear that they would offset the consumption-dampening effects of the tax hike with a 6-trillion-yen stimulus program. USDJPY was off its highs of 98.73, but remained bid at the 98.00 level.
The USDJPY pair remains contained in a very narrow range and is now ultra-dependent on the actions of US policymakers. If Congress can resolve its legislative impasse and the US economy continues to perform, the Federal Reserve will be much more likely to taper asset purchases and provide a strong growth catalyst for USDJPY. However, if US political and economic conditions remain in turmoil, USDJPY is unlikely to move much in either direction.
A Rare Miss in UK Data
In the UK today, the PMI manufacturing data missed its mark, printing at 56.7 versus 57.3 expected. This was the first decline in more than six months and sent GBPUSD briefly towards the 1.6200 level. However, the manufacturing data in the UK shows that activity remains near recent highs, and the British pound (GBP) was able to stabilize at 1.6230 in the aftermath of the news.
Aussie Is Last Night’s Big Winner
The clear winner last night was the Australian dollar (AUD), which rose more than 100 points from its lows after a surprisingly hawkish RBA statement. The central bank left rates on hold and noted that it still sees sub-par growth continuing in the near term. However, it also noted the improvement in business and consumer sentiment and appeared unconcerned with the recent rise in the AUDUSD exchange rate, noting that the unit was still 10% below its April highs.
The mildly upbeat tone from the RBA erased any concerns over an imminent rate cut, and in fact, futures pushed the prospects for another reduction in benchmark rates all the way out to February 2014. The AUDUSD remains well bid at the .9400 level, but the pair is likely to encounter much stiffer resistance at .9500, so the upside potential is limited.
US Data That Could Support the Dollar
In North America today, the focus will remain on Washington, although lawmakers are unlikely to resume negotiations and the dollar could come under increased selling pressure if the situation appears to be deadlocked.
At 10:00 am ET (14:00 GMT), the market will get a look at the US ISM manufacturing report, with market participants looking for a very small pullback to 55.3. If the data beats to the upside, however, the dollar may see some relief as the day progresses.
By Boris Schlossberg of BK Asset Management