Dollar Dumped on Downgrade as Profit Taking Kicks In

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Market Drivers for October 17, 2013
Chinese ratings agency downgrades US debt to A- accelerating profit taking in the dollar
UK Retail Sales beats pushing cable towards 6100
Nikkei 0.83% Europe -.58%
Oil $101/bbl
Gold $1282/oz.

Europe and Asia:
AUD NAB Business Confidence 3 vs. 1
EUR CA 17.4B vs. 17.7B
UK Retail Sales 0.6% vs. 0.5%

North America:
USD Unemployment claims 8:30

The dollar came under heavy selling at the start of European trade in a classic sell the news dynamic with profit accelerated by the news that a Chinese ratings agency downgraded US debt to A- from A status. US lawmakers finally came to terms and passed both the budget and the debt ceiling extension in a 11th hour vote in Congress last, allowing the government to re-open. The dollar hits its highs just after the Senate vote with USD/JPY briefly trading above the 99.00 level.

However as the night progressed the greenback came under steady selling pressure that accelerated rapidly at the start of London trade on reports that Chinese ratings agency Dagong downgraded US debt to A- from A. The move was not doubt self serving and part of broader Chinese campaign to “de-Americanize” global trade as China attempts ascend to reserve currency status, but the move nevertheless provided the fuel for further dollar liquidation with EUR/USD rising to 1.3630 while cable eyed the 1.6100 level and Aussie circled near the 9600 figure.

The markets are uncertain about the long term impact of the government shutdown on the US economy, but the latest estimate by the S&P suggested that US may lose as much as -0.6% of GDP in Q4 due to the standoff in Washington DC. At the very least, the shutdown saga has insured that the Fed is likely to maintain its QE policy into the year end and perhaps even all the way to March of 2014 before US monetary officials feel comfortable enough to curtail stimulus.

Such a scenario is likely to keep the dollar under pressure for the time being especially is US economic data shows significant weakness as a result of the political machinations of the past two weeks. One of the more positive aspects of the shutdown saga is that it was resolved well before the key Christmas spending season and therefore may have only a minimal impact on consumer spending in Q4.

Elsewhere, consumer spending in UK provided a spark for the pound as Retail Sales rose 0.6% versus 0.5% eyed. Retail Sales beat in all 4 series with year on year, month over month, headline and core numbers all exceeding expectations. Discretionary non-food food sales remained strong but food sector was soft.

Overall this a third month of gains out of the past four and suggests that UK consumer demand continues to expand at a positive albeit modest pace. Todays news should be a net contributor to UK GDP growth and is clearly supportive of the pound, although the pair continues to face resistance at the 1.6100 level and even greater resistance at 1.6200. Still if the anti-dollar rally continues into North American trade, sterling could push towards 1.6150 as the day proceeds.

With only jobless claims on the docket today, the North American session in FX is likely to serve as a referendum on last night’s vote. With the political drama behind us, the focus is likely to turn to economics with currency investors much like their equity brethren likely watching earnings news for any clues about US demand going forward. Unless the corporate news surprises to the upside the dollar may come in for more profit taking as currency markets begin to factor in the economic ramifications of the political battle just ended.

Boris Schlossberg
Managing Director

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