Dollar Rebounds As Stalemate Persists

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Market Drivers for October 8, 2013
Markets dead in the water with dollar mildly bid
USD/JPY retakes 97.00 after buyers come in ahead of 96.50
Nikkei .20% Europe -.11%
Oil $103/bbl
Gold $1325/oz.

Europe and Asia:
AUD NAB Business confidence 12 vs. 4
GBP RICS 54% vs. 45%
EUR GE Trade Balance 15.6B vs. 15.1B
EUR Factory Orders

North America:
CAD Housing Starts 8:15
CAD Trade Balance 8:30
USD IBD/TIPP Economic Optimism

Markets remained in a state of suspended animation as progress on US budget talks proved elusive, but the dollar saw a mild bid in Asian and early European session as some bargain hunting kicked in. With little economic data on the docket currencies continued to trace out very narrow ranges but the buck gained some ground especially against the yen as the pair rebounded through the 97.00 figure.

At the close of North American session yesterday, USD/JPY came under heavy selling as markets remained frustrated with lack of progress on US budget negotiations. The pair dipped to a low of 96.56, but bids ahead of the 96.50 level provided support and the pair has been pushing higher all night long as short covering helps to boost it back above the 97.00 level.

Although the threat of US default is clearly a worry for the currency market one reason that it has not created more of a risk off sentiment just yet is because the crisis is completely manufactured. Fiscally US is in a relatively strong shape having reduced its budget deficits at the fastest pace in history. Therefore the issue with US sovereign debt is not credit risk but political risk and markets continue to believe that some sort of a deal will be struck.

Nevertheless, the partial shutdown of the government is clearly starting to take a toll. Most notably in US consumer confidence. According to the Gallup daily tracker of US Economic Confidence the index has plunged to -34 down 14 points from just two weeks ago and at its lowest level since December 2011.

Although Gallup figures are mainly reflecting the anxiety over the current budget impasse, they could become a serious concern for the US economy if they begin to translate into slower spending especially ahead of the key Christmas shopping season. In short the longer the budget battle looms, the more difficult it will become to “restart” the US economy and that could have more negative consequences for the US dollar.

For now the currency markets are content to tread water as they await fresh developments out of Washington DC. With public polling now running at 70% against the GOP, the political pressure on the Republicans may be building and that could provide an impetus for some sort of resolution before the week’s end. For now USD/JPY continues to hold support at the 96.50 level and the pair could see a quick short covering rally to 98.00 on any potential positive news out of Washington. On the other hand if the stalemate drags through the week-end the downside pressure on the dollar could accelerate and the pair could tumble towards the 95.00 handle.

Boris Schlossberg
Managing Director

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