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Glitter of Hope of US Budget Deal Sends Dollar Up, 'Risky' FX Higher

Glitter of Hope of US Budget Deal Sends Dollar Up, 'Risky' FX Higher

2013-10-08 11:57:00
Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Day eight of the US government shutdown and few signs of resolution.

- US debt limit hit on October 17 (9 days).

- Signs of cracks in Democrat strategy has markets hoping a deal could emerge.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.05% (-0.30%prior 5-days)


The first kinks in the Democrats armor were exposed late-Monday when it appeared that a schism in negotiating tactics between the White House and Senate Democrats emerged. Comments made by advisors close to President Barack Obama suggest that the executive branch is open to a short-term extension of the debt limit, likely to around the Thanksgiving holiday; while Senate Democrats want to make no such compromise.

The mere whiff of the scent that a default could be avoided has investors surreptitiously putting capital back into higher yielding FX, specifically the “carry trade,” with the Australian and New Zealand Dollars boasting respectable gains against the safe havens, the Japanese Yen and the Swiss Franc. For all intents and purposes, the US Dollar is middling along only down -0.05% against a basket of the Australian Dollar, the British Pound, the Euro, and the Japanese Yen; hopeful, positive US fiscal developments are allowing the greenback to at least tread water here.

Whether or not these rumors pan out, only time will tell; I think we’re looking at fool’s gold here rather than bullion itself. Neither party has yet to put forward a sincere gesture – a bill, for example – that would set in motion plans to end the government shutdown and raise the debt ceiling. Moreover, it makes even less sense that the White House and Senate Democrats – who have gained in polling figures in recent days with Congressional Republicans bearing the brunt of blame for the shutdown – would cave this ‘far away’ from the US debt deadline; which will occur in 9 days on October 17.

Coming out of the US fiscal issues, I remain confident in my recent pivot in Euro outlook, that the Euro should remain elevated through such turmoil and eventually gain afterwards. Looking back to 2011, the EURUSD only lost -0.5% in the following day after the US lost its ‘AAA’ rating from Standard & Poor’s; -0.2% within five days; and finished the month up by +0.9%.

The EURUSD was able to maintain price despite the Euro-Zone’s issues flaring up (Greece) and the US fiscal problems; with the Euro component in a healthier position, why would the result be any more negative? Moreover, in light of the US government shutdown and ensuing debt limit debate – factors that were listed at the September policy meeting – it is increasingly unlikely that the Federal Reserve tapers QE3 in October, leaving December as the last opportunity to taper in 2013

EURUSD 5-minute Chart: October 8, 2013 Intraday

Glitter_of_Hope_of_US_Budget_Deal_Sends_Dollar_Up_Risky_FX_Higher_body_x0000_i1027.png, Glitter of Hope of US Budget Deal Sends Dollar Up, 'Risky' FX Higher

Taking a look at European credit, mixed action across the continent has had a neutral impact on the Euro.The Italian 2-year note yield has increased to 1.653% (+3.8-bps) while the Spanish 2-year note yield has increased to 1.355% (+3.8-bps). Likewise, the Italian 10-year note yield has increased to 4.339% (+5.3-bps) while the Spanish 10-year note yield has increased to 4.251% (+5.0-bps); higher yields imply lower prices.

Read more: Japanese Yen Rallies, Aussie Suffers as US Fiscal Issues Remain Elevated


Glitter_of_Hope_of_US_Budget_Deal_Sends_Dollar_Up_Risky_FX_Higher_body_Picture_1.png, Glitter of Hope of US Budget Deal Sends Dollar Up, 'Risky' FX Higher

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--- Written by Christopher Vecchio, Currency Analyst

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