No Deal – No Movement as FX at Standstill

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Market Drivers for October 14, 2013
No DC deal – no movement as FX at standstill
Aussie shakes off Chinese Trade data
Nikkei closed Europe -0.12%
Oil $102/bbl
Gold $1275/oz.

Europe and Asia:
AUD Home Loans -3.9% vs. -2.1%
CNY CPI 3.1% vs. 2.9%

North America:
No data

With Tokyo and North America both on bank holidays currency markets started the week on a very sluggish note exacerbated by the fact that US legislators have not yet struck an agreement on the debt ceiling deal as the October 17th headline approaches.

Although negotiations continue in the Senate lawmakers have not yet come to terms on the deal of the US budget with Democrats now refusing to accept the original terms of the sequester as they bargain for more spending. Although the horse trading is now close to entering the 11th hour, markets appear unperturbed as investors remain convinced that US policymakers will not allow the sovereign to default on its obligations.

With Republicans clearly now on defensive having given up almost all of their bargaining demands, the prospects for a deal has increased markedly. There is however, the chance that Democrats having sensed an advantage may now overplay their hand, but with three days still remaining to strike a bargain the chance of a negotiated to the US budget and debt ceiling crisis remains high.

On the economic front the only data of note was the week-end release of Chinese Trade numbers which disappointed the market by printing at 15.2B versus 25.2B eyed. Exports unexpectedly fell by -0.3% versus expectations of 5,5% rise. The drop in exports was broad based with volumes falling across the board in EU, Hong Kong and Taiwan. However some of the decline was blamed on faking of data in 2012 and 2013 by double counting exports to Hong Kong before authorities cracked down on that practice.

Despite the weak Chinese trade data, Aussie managed to shrug off the news and rebound off its session lows of 9422 set at the start of Asia, to trade at 9470 by mid morning London dealing. One sign of encouragement was the continuing demand for iron ore out of China which indicated that Australia export demand will likely remain relatively stable.

Still despite the bookeeping issues, the massive drop in Chinese trade numbers is troubling as it suggests that global demand, after showing some signs of life in Q2 of this year may be waning once again. This only reinforces the importance of a negotiated settlement in the US budget process as the standstill in Washington has already damaged consumer confidence and likely weakened final demand as both businesses and consumers await a resolution.

For now the markets remain in wait and see mode as all eyes are firmly fixed on Washington DC. And while the pace of trading remains placid, volatility could skyrocket at anytime if the prospect of default becomes likely.

Boris Schlossberg
Managing Director

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