Forex: Dollar - Is a Government Shutdown Bullish or Bearish?

DailyFX

Talking Points:

  • Dollar: Is a Government Shutdown Bullish or Bearish?
  • Euro Faces Heavy Event Risk in ECB Decision, Italy Reckoning
  • Japanese Yen: Does a Tax Hike Equate to Risk Aversion or More BoJ Stimulus?

Dollar: Is a Government Shutdown Bullish or Bearish?

There is a broad contrast in market interpretations of whether a US government shutdown hurts the dollar or general risk trends (USD bullish) more. Yet, the general lack of market volatility in response to this high profile event is surprising traders on both sides of the aisle. Is the fiscal and political impasse not a pertinent concern for the US and global capital markets? It does carry an important fundamental influence. Each day that the government remains shut, the US economy suffers an estimated $300 million loss. Extend this stalemate multiple weeks, and the total economic impact can carve off a significant percentage of the fourth quarter US GDP. Yet, as material as this daily tally is, it is not particularly shocking for a market that has maintained its speculative bearings through worse over the years.

However, the longer a budget agreement is not met; the weightier the speculative fear will become. By Treasury Secretary Jack Lew’s estimates, in just over two weeks (October 17 to be precise) the United States will reach its debt limit. If the country were to breach that barrier, the implications would be far more material. In contrast to the orderly funding cuts to specific federal programs during the shutdown, the curb of capital in the alternative scenario would be disorganized and costly. Perhaps most importantly of all, the US would face a technical default as it prioritizes payments to debtors. Fear of further downgrades for the world’s largest economy and the funding disruptions could materially unnerve global sentiment – the August 2011 downgrade is a good indication of that. With each day that passes in the government shutdown, the sense of internal strife as the more important decision approaches grows. Meanwhile, risk trends are not beholden to US politics alone. There are many other sparks that can set off a speculative run (bullish or bearish); so FX traders should remain vigilant.

Euro Faces Heavy Event Risk in ECB Decision, Italy Reckoning

The euro is the most at-risk major currency over the next 24 hour trading period. Over Wednesday’s trading session, we have two key events that can stir volatility for the euro and European markets. Up first, Italian Prime Minister Letta is scheduled to address Parliament about the chaos that has befallen the countries government at 7:30 GMT (9:30 local). After five members of the cabinet announced their resignation and Silvio Berlusconi’s People of Liberty Party (PdL) threatened to withdrawal support of the troubled coalition government, the EZ’s third largest economy – suffering an ongoing recession and holding Europe’s largest debt load – was labeled a reemerging risk to the region’s stability. That said, recent reports of up to 40 possible defectors from the PdL could tame this immediate risk. The other top tier event on deck is the ECB rate decision. Aside from a reminder of the OMT’s presence, little is expected. Yet, that consensus offers generous surprise opportunity.

Japanese Yen: Does a Tax Hike Equate to Risk Aversion or More BoJ Stimulus?

This past session, Japanese Prime Minister Shinzo Abe announced his intentions to move forward with an increase to the national sales tax from 5 to 8 percent. Given Japan’s over 200 percent public debt to GDP (unprecedented in the developed world), the move is considered essential to working off the balance and holding onto critical investor confidence. Alternatively, a tax hike can curb an uneasy economic recovery. To help offset the detrimental impact to growth, the premier had also confirmed a ¥5 Trillion stimulus program – though the details are still vague. In response, the yen crosses are modestly softer. So far, the market is not equating tax hike to more BoJ stimulus.

New Zealand Dollar Leads an Early Risk Aversion Drive

Through a mild risk aversion shift early Wednesday, the New Zealand dollar was notably leading the high yield / risk pack with the steepest drop and notable breaks versus the USD, JPY and AUD. Why does the major with the highest market rates (its 10-year Treasury yield is 4.58 percent versus the Aussie’s 3.97) and most impressive rate forecast (pricing in approximately 75 basis points of hikes over the coming 12 months) taking the biggest hit? There was headline fodder worth taking note of. RBNZ Assistant Governor John McDermott remarked that rates should remain stimulatory for some time, but those comments crossed the wires well after the initial move and are not particularly damning. A more fitting reason for the kiwi to suffer the most is that it had the most to lose. At one point, the kiwi’s rate forecast was nearly 100 basis points worth of hikes over the coming year. The bleed in premium alongside that tempered forecast acted as a risk accelerant.

British Pound Stalls Immediately after GBPUSD Breakout, Troubled

The sterling managed a modest advance against most of its major counterparts, but there was little conviction to the drive. Over the past five months, the currency has gained serious traction thanks to a swing in rate forecasts that can be seen in the over 85 percent surge in the 10-year Gilt’s yield. Yet, the forward shifted rate hike expectations that the market ran the projections on have contradicted the BoE’s repeated warnings, and the market is starting to take head after the premium swell. If risk aversion takes down global rate forecast, the cable will be hardhit.

Australian Dollar Outlook Still Leans Bullish Post RBA

The Reserve Bank of Australia (RBA) announced Tuesday morning that they had kept policy unchanged and that they did not expect to alter the benchmark lending rate through the foreseeable future. That would typically be considered a non-event; but for a carry currency that has been battered by a regime of rate cuts, no change is a bullish shift. The Aussie dollar is still sitting at a significant discount due to the speculative shorts riding a steady dovish regime. Yet, the full recovery effort will only be realized if the appetite for yield rises (aka risk appetite).

Gold Tumbles on a Swell in Demand for a Dollar Alternative?

One of gold’s historical fundamental roles is as an alternative store of wealth. This served the metal especially well from 2009 through 2011 when the dollar’s value was eroded by tremendous swell in stimulus by the Federal Reserve. Yet, where is that boost now? After the FOMC decision two weeks ago to defer the ‘Taper’, the precious metal popped higher as expected. With the overnight US government shutdown, though, that connection was broken. When the US markets came online, the precious metal tumbled as much as 3.4 percent from the headline – crashing through $1,300 in the process. Not only does this counter the expected reaction, but the intensity of the commodity’s run stood out against a backdrop of inaction. Meanwhile, the CBOE’s gold volatility index has risen above 25 percent while SPDR Gold ETF volume posted its fourth highest volume turnover (16.7 million shares) in three months. More important than this break is follow through.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

EUR

Italian Budget Balance (euros) (SEP)

-9.2B

With the political crisis driving yields higher, previous estimates of the budget might end up on the optimistic side.

1:00

NZD

ANZ Commodity Price (SEP)

0.7%

Although the print has recovered since its June low, it is far below April’s high of 12.6%.

1:00

AUD

HIA New Home Sales (MoM) (AUG)

-4.7%

Australia has tracked China in a brief rebound as incoming data has shown improvements over the past two months. Incoming data must continue to improve if market participants are to hold the Aussi at these higher levels.

1:30

AUD

Trade Balance (Australian dollar) (AUG)

-450M

-765M

1:30

AUD

Building Approvals (MoM) (AUG)

-1.0%

10.8%

1:30

AUD

Building Approvals (YoY) (AUG)

12.3%

28.3%

8:30

GBP

Purchasing Manager Index Construction (SEP)

60.0

59.1

Surveys were 60 last week.

9:00

EUR

Euro-Zone Producer Price Index (MoM) (AUG)

0.1%

0.3%

Low levels of price increases continue to leave the door open for further action from the ECB if necessary. The big event for the Euro will be Draghi speaking at 12:30GMT.

9:00

EUR

Euro-Zone Producer Price Index (YoY) (AUG)

-0.6%

0.2%

11:00

USD

MBA Mortgage Applications (SEP 27)

5.5%

Market participants continue to monitor changes in mortgage applications as interest rates move higher.

11:45

EUR

European Central Bank Interest Rate Decision

0.50%

0.5%

11:45

EUR

European Central Bank Deposit Facility Rate

0.00%

0.0%

12:15

USD

ADP Employment Change (SEP)

175K

176K

Crude has finally broken some key levels to the downside even as OPEC announced it will be reducing production in 2014.

13:45

USD

ISM New York (SEP)

60.5

14:30

USD

DOE U.S. Crude Oil Inventories (SEP 27)

2635K

14:30

USD

DOE U.S. Distillate Inventory (SEP 27)

-234K

14:30

USD

DOE U.S. Gasoline Inventories (SEP 27)

217K

23:30

AUD

AiG Performance of Service Index (SEP)

39

The last price was the lowest since the spring of 2009.

23:50

JPY

Japan Buying Foreign Bonds (Yen) (SEP 27)

23:50

JPY

Japan Buying Foreign Stocks (Yen) (SEP 27)

23:50

JPY

Foreign Buying Japan Bonds (Yen) (SEP 27)

23:50

JPY

Foreign Buying Japan Stocks (Yen) (SEP 27)

GMT

Currency

Upcoming Events & Speeches

07:30

EUR

Italian PM to Address Italian Parliament on Government

12:30

EUR

ECB President Mario Draghi Holds Press Conference

16:00

USD

Fed's Eric Rosengren Speaks on U.S. Economy

19:20

USD

Fed's Bullard to Speak on Community Banks

19:30

USD

Fed Chairman Ben Bernanke Speaks on Banking Sector

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.4800

2.0500

10.7250

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

12.9700

2.0100

10.5000

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.1758

2.0106

10.1172

7.7541

1.2527

Spot

6.3696

5.5157

5.9961

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

6.0800

5.5175

5.7450

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3629

1.6299

98.88

0.9146

1.0413

0.9475

0.8326

133.75

1324.98

Res 2

1.3603

1.6268

98.60

0.9126

1.0396

0.9449

0.8301

133.36

1316.38

Res 1

1.3576

1.6237

98.32

0.9106

1.0379

0.9424

0.8276

132.97

1307.77

Spot

1.3522

1.6175

97.76

0.9065

1.0345

0.9374

0.8226

132.19

1290.56

Supp 1

1.3468

1.6113

97.20

0.9024

1.0311

0.9324

0.8176

131.41

1273.35

Supp 2

1.3441

1.6082

96.92

0.9004

1.0294

0.9299

0.8151

131.02

1316.38

Supp 3

1.3415

1.6051

96.64

0.8984

1.0277

0.9273

0.8126

130.63

1324.98

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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