Market Drivers for October 1, 2013
US government shuts down, dollar weakens somewhat
RBA tone hawkish sends AUD/USD through 9400
Nikkei 0.20% Europe 0.40%
Oil $102/bbl
Gold $1333/oz.

Europe and Asia:
JPY Tankan 12 vs. 7
AUD RBA keeps rates in hold
EUR GE unemployment 25K vs. -5K
GBP UK PMI Manufacturing

North America:
USD ISM Manufacturing 10:00

With US government shutdown, a new tax hike in Japan, RBA’s hawkish monthly statement and the miss in UK PMI Manufacturing data, its been an extraordinarily busy news night in FX. However the torrent of newsflow has not translated into a much of price movement in the currency market as the dollar was only mildly weaker by mid morning London dealing.

The impact of US government shutdown was relatively muted in both equity and currency markets,although EURUSD did climb to fresh monthly highs at 1.3588 but failed to clear the 1.3600 level after German data missed its mark. German manufacturing PMI printed at 51.1 versus 51.3 eyed. but perhaps most worrisome was the sharp rise in unemployment.

German unemployment rose by 25K versus -5K eyed suggesting that labor markets in Eurozone’s largest economy are no longer growing. This was the second consecutive monthly of increase in joblessness in Germany which bodes badly for EZ growth going forward especially as the country remains in political limbo.

In Japan the much stronger than expected Tankan data which saw the index rise to 12 from 7 forecast, helped to convince Prime Minister Abe to proceed with the hike in the national sales tax to 8%. The move initially strengthened the yen 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. USD/JPY was off its highs of 98.73 but remained bid at the 98.00 level.

The pair remains contained in a very narrow range is now really dependent on the actions of US policymakers. If US congress can resolve its legislative impasse and US economy continues to perform, the Fed will be much more likely to taper QE and thus provide a strong reason for USD/JPY. However if US political and economic conditions remain in state of turmoil USD/JPY is unlikely to move much in either direction.

In UK today the PMI Manufacturing data missed its mark as it printed at 56.7 versus 57.3 eyed. This was the first decline in more than 6 months and it sent cable towards the 1.6200 level briefly. However, the manufacturing in UK shows that activity remains near recent highs and pound was able to stabilize at 1.6230 in the aftermath of the news.

The clear winner of the night was Aussie as it rose more than 100 points off the lows after a surprisingly hawkish RBA statement. RBA left rates on hold and noted that it still sees growth below trend 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 AUD/USD exchange rate as it pointed out that the unit was still 10% off its highs set in April.

The mildly upbeat tone of the RBA erased any concerns over an imminent rate cut and in fact futures pushed the prospect of another reduction in benchmark rates all the way out to February of 2014. The Aussie remains well bid at the 9400 level but the pair is likely to encounter much stiffer resistance at the 9500 level, so its upside potential is limited.
In North America today the focus will be on Washington DC, although lawmakers are unlikely to resume negotiations and the dollar could come under increasing selling pressure if the situation appears to be deadlocked. At 1400 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 buck may see some relief as the day proceeds.

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