Dollar Dumped Despite Debt Deal
Even after the US budget and debt resolution, the US dollar fell victim to profit taking early Thursday, which accelerated following the reported downgrade of US debt by China.
US lawmakers finally came to terms and passed both the budget and debt-ceiling extension in an eleventh-hour vote in Congress, allowing the government to re-open starting today. The US dollar (USD) reached its highs just after the Senate vote, with USDJPY briefly trading above the 99.00 level.
However, as the night progressed, the greenback came under steady selling pressure, which accelerated rapidly near the London open on reports that Chinese ratings agency Dagong downgraded US debt to A- from A.
The move was no doubt self-serving and part of the broader Chinese campaign to "de-Americanize" global trade as China looks to ascend to reserve currency status. Nevertheless, it provided the fuel for a classic “sell the news” scenario, further amplifying dollar liquidation as EURUSD rose to 1.3630, GBPUSD eyed 1.6100, and AUDUSD circled near .9600.
The markets are uncertain about the long-term impact of the government shutdown on the US economy, but the latest estimate by Standard & Poor’s suggested that the US may lose as much as -0.6% of Q4 GDP due to the standoff in Washington.
At the very least, the shutdown saga has insured that the Federal Reserve is likely to maintain its current monetary policy into year-end, and perhaps all the way until March 2014, when US monetary officials could feel comfortable enough to curtail stimulus measures.
See also: Why Now Is No Time for Tapering
Such a scenario is likely to keep the dollar under pressure for the time being, especially as US economic data shows significant weakness as a result of the political dysfunction seen in recent weeks. One of the more positive aspects of the shutdown, however, is that it was resolved before the key Christmas spending season, and therefore, it may have only a minimal impact on Q4 consumer spending.
The UK Consumer Rally Continues
Elsewhere, UK consumer spending provided a spark for the British pound (GBP) as retail sales rose 0.6% versus 0.5% expected. Retail sales beat in all four measures, with year-over-year, month-over-month, headline, and core numbers all exceeding expectations. Discretionary non-food sales remained strong, but the overall food sector was soft.
This is the third month out of the past four that showed gains in UK retail sales, which suggests that consumer demand continues to expand at a positive, albeit modest pace. The news should be a net contributor to UK GDP growth and is clearly supportive of the pound, although GBPUSD continues to face resistance at the 1.6100 level and even greater resistance at 1.6200. Still, if the anti-dollar rally continues into today’s North American session, GBPUSD could push towards 1.6150 as the day progresses.
In US, Politics Are Out, Earnings Are in
With only jobless claims on the economic calendar, Thursday’s North American session is likely to serve as a referendum on last night's vote.
With the political drama (temporarily) behind us, the focus is likely to turn to economics, with equity and currency traders watching US corporate earnings news for any clues about US demand going forward. Unless the news surprises to the upside, the dollar may see more profit taking as currency markets begin to factor in the economic ramifications of the political battle and US debt.
By Boris Schlossberg of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.