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Absent Fiscal Deal Sparks Rise in FX Volatility, Uncertainty for US Dollar

Absent Fiscal Deal Sparks Rise in FX Volatility, Uncertainty for US Dollar

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Day sixteen of the US government shutdown: the debt deal that would cover costs into the 1Q’14 in question.

- US debt limit hit on October 17 (tomorrow).

- House Republicans reject bipartisan Senate bill that would have ended stalemate.

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INTRADAY PERFORMANCE UPDATE: 09:40 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+0.12%

+0.12%

0.00%

+0.04%

+0.16%

-0.23%

+0.45%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.09% (-0.13% prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

A breakdown in talks between Democrats and Republicans late on Tuesday jolted market participants and put an immediate halt to the bubbling optimism that began at the end of last week. The US Dollar, which had shown signs of basing amid a resolution of the fiscal deadlock, has taken a modest step lower again as uncertainty reigns just one day before the debt limit is hit.

Headlines after the US cash equity session have proved to be the major determinant of price action in both the Asian and European sessions. The safe haven currencies swung violently against the commodity currencies in particular, with the many of the major’s daily ranges having been set during the illiquid 16:00 EDT/20:00 GMT to 20:00 EDT/00:00 GMT interssion break.

The shift in the expected outcome of the US fiscal negotiations yesterday – a medium-term resolution to nothing at all – has only had a modest impact on risk appetite. One needs to look no further than the AUDJPY, which is up by +0.35% on the day. Uncertainty, with respect to the US Dollar however, is rising. Take note of the overnight change in implied volatiltiy over the next week:

Percent Change 1-week Implied Volatility: October 15 to October 16, 2013

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+3.99%

+5.31%

+6.07%

+5.62%

+2.56%

+8.06%

+1.56%

Of note, expectations for US Dollar volatility jumped by +6.07% and +8.06% against the Swiss Franc and the Japanese Yen, respectively, a sign that the US Dollar may continue to suffer against its safe haven counterparts over the coming days – perhaps on the heels of a less-than-optimal (with the standard being yesterday’s purported three-month continuing resolution to reopen the government and four-month debt limit extension).

USDJPY 5-minute Chart: October 16, 2013 Intraday

Absent_Fiscal_Deal_Sparks_Rise_in_FX_Volatility_Uncertainty_for_US_Dollar__body_x0000_i1027.png, Absent Fiscal Deal Sparks Rise in FX Volatility, Uncertainty for US Dollar

Thus far today, traders have been fading the uptick in the USDJPY from the start of the Asian session, and today’s daily Inverted Hammer, Inside Bar highlights the hesitation among traders as the debt deadline approaches at the end of today.

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

ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION

Absent_Fiscal_Deal_Sparks_Rise_in_FX_Volatility_Uncertainty_for_US_Dollar__body_Picture_1.png, Absent Fiscal Deal Sparks Rise in FX Volatility, Uncertainty for US Dollar

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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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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