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Buy the Rumor: AUD, NZD Lead on US Debt Hope; USD Eyes Rebound

Buy the Rumor: AUD, NZD Lead on US Debt Hope; USD Eyes Rebound

2013-10-15 10:30:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Talking Points:

- Day fifteen of the US government shutdown but a debt deal that would cover costs into the 1Q’14 is now likely.

- US debt limit hit on October 17 (2 days).

- ‘Buy the rumor, sell the news’ in risk, or is this the beginning of something bigger?

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INTRADAY PERFORMANCE UPDATE: 09:40 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+0.41%

+0.03%

-0.55%

-0.41%

-0.28%

-0.10%

+0.36%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.06% (+0.56%prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

The shift in the risk profile towards a more optimistic view comes on the heels of reports that Democratic and Republican Senators are finalizing plans to open the government with funding through January and to raise the debt limit through February. This is a far better outcome than what was previously envisioned, only a six-week debt limit extension and no continuing resolution to reopen the government.

As has been typical the past few weeks, the Australian and New Zealand Dollars have benefited from the increasingly positive US fiscal headlines. Investors have been front-running any resolution since Thursday, and by Friday there were veritable signs of an improving global risk profile in equities and FX alike. Considering the shift in risk tolerance comes alongside subsiding US credit risk, the US Dollar may strengthen over the coming days.

The US Dollar is showing signs of basing against its major counterparts after several days of Hammers forming on the Dow Jones FXCM Dollar Index daily chart. With short-term topping patterns in play against the British Pound and the Euro, it looks like subsiding fears over a US default – inherently USD-negative – are helping the world’s reserve currency retake some of its recent losses against its European and lower yielding majors; while high beta FX has led the rally higher. In fact, the GBPUSD is now teetering at major support.

GBPUSD H8 Chart: June 27 to October 15, 2013

Buy_the_Rumor_AUD_NZD_Lead_on_US_Debt_Hope_USD_Eyes_Rebound_body_Picture_1.png, Buy the Rumor: AUD, NZD Lead on US Debt Hope; USD Eyes Rebound

The GBPUSD has traded in an uptrend since the first week of July but a sustained hold below the ascending channel for the past few days suggests that the next move is lower. Indeed, the rest of $1.6000 in the GBPUSD today failed, and fresh week lows were set. A daily close under 1.5920 – the October lows – would seek a test of the gap open for the week of September 15 to 20 at 1.5870 over the coming session.

Taking a look at European credit, rising yields across the continent come on the back of stronger equity markets, indicating a risk-positive atmosphere as the US fiscal deadlock nears its resolution. The Italian 2-year note yield has increased to 1.549% (+0.1-bps) while the Spanish 2-year note yield has increased to 1.365% (+0.14-bps). Likewise, the Italian 10-year note yield has increased to 4.254% (+0.4-bps) while the Spanish 10-year note yield has increased to 4.278% (+2.0-bps); higher yields imply higher prices.

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

ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION

Buy_the_Rumor_AUD_NZD_Lead_on_US_Debt_Hope_USD_Eyes_Rebound_body_x0000_i1028.png, Buy the Rumor: AUD, NZD Lead on US Debt Hope; USD Eyes Rebound

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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