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US Budget Impasse Sinks USD, Lifts JPY with Default Deadline on Thursday

US Budget Impasse Sinks USD, Lifts JPY with Default Deadline on Thursday

2013-10-14 10:19:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- Day fourteen of the US government shutdown and a short-term deal (approximately six-weeks) is said to be in the works.

- US debt limit hit on October 17 (3 days).

- Breakdown in talks between Democrats and Republicans over the weekend knocks back risk appetite significantly.

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INTRADAY PERFORMANCE UPDATE: 09:40 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+0.02%

+0.02%

+0.18%

+0.09%

+0.06%

+0.30%

+0.50%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.09% (+0.42%prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

US budget talks stalled over the weekend and risk assets around the world took a hit at the weekly open as the seemingly once-dismissed threat of a US default is very much alive – and seen fast approaching this Thursday. With the key Democrat in the White House and House Republicans failing to find common ground – the fertile rumor soil that gave “risk” a boost on Thursday and Friday – high yielding currencies and risk-correlated assets have fallen sharply in Asia and thus far in Europe on Monday.

With the impetus for compromise resting with Senate Democrats and Republicans for the time being, reintroduced tension has the Japanese Yen reviving its role as safe haven du jour. The commodity currencies on the whole have struggled at the start of the week – no doubt due to their high correlation with US equity markets at the moment.

In fact, looking at the “carry trade,” the relationship between risky FX and other asset classes is obvious. The rolling 20-day correlation between the AUDJPY and the S&P 500 is currently +0.63, and has oscillated between +0.53 and +0.72 in October.

During periods of lows in sentiment over the past several years, especially since 2008, we’ve noted that risky assets’ short-term correlations (like the rolling 20-day) tend to strengthen as market participants simply revert to a simple, more fear-based binary system of buying or selling everything in their portfolio en masse. It is likely that this would only be the beginning of trouble for the commodity currencies – the Australian, Canadian, and New Zealand Dollars – if the US fiscal impasse isn’t resolved quickly before Thursday.

AUDUSD Daily Chart: June 24 to October 14, 2013

US_Budget_Impasse_Sinks_USD_Lifts_JPY_with_Default_Deadline_on_Thursday_body_x0000_i1027.png, US Budget Impasse Sinks USD, Lifts JPY with Default Deadline on Thursday

Taking a look at European credit, lower peripheral yields are helping keep the Euro elevated; though we admit that sentiment is largely being dictated by US fiscal headlines at this point.The Italian 2-year note yield has decreased to 1.542% (-3.6-bps) while the Spanish 2-year note yield has decreased to 1.364% (-1.3-bps). Likewise, the Italian 10-year note yield has decreased to 4.249% (-2.4-bps) while the Spanish 10-year note yield has decreased to 4.261% (-2.2-bps); lower yields imply higher prices.

Read more: Euro Needs Signs of Continued Economic Recovery Before Next Rally

ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION

There are no events on the North American calendar for Monday, October 14, 2013. See the DailyFX Economic Calendar for the week of October 13 to 18, 2013.

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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