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Dollar Dives as Focus Moves from Debt Deal to Incoming Fed Rhetoric

Dollar Dives as Focus Moves from Debt Deal to Incoming Fed Rhetoric

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Debt deal sees continuing resolution fund the government through January 15, raise the debt limit to February 7.

- US Treasury T-bills due around the new deadline have seen yields start to rise – a clear sign of “kicking the can,” or that the measures are just a stop-gap to the next mini-crisis.

- Continued strength in US Treasuries despite the debt deal suggests that investors are looking to another non-taper by the Federal Reserve.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.66% (-0.67% prior 5-days)


What would have been a truly horrible day has been avoided thanks to an eleventh-hour deal between Congressional leaders, although the US fiscal circus has merely been rescheduled to the 1Q’14 at this point in time. While 1-month T-bill yields continue to pullback, it is worth noting that yields for debt maturing around the next debt limit – February 7 – has already started to spike, suggesting more political fracas is ahead.

As noted yesterday, the rise in USD 1-week implied volatility against the Japanese Yen and the Swiss Franc was a poor sign of things to come; and today, with US fiscal risks merely pushed back into the 1Q’14, both safe havens have rebounded and are the top two performers on the day. The shift is further reinforced by the growing belief that the Federal Reserve will have to keep QE3 on hold in October, its second to last policy meeting of the year.

USDJPY5-minute Chart: October 17, 2013 Intraday

Dollar_Dives_as_Focus_Moves_from_Debt_Deal_to_Incoming_Fed_Rhetoric_body_x0000_i1027.png, Dollar Dives as Focus Moves from Debt Deal to Incoming Fed Rhetoric

With a backlog of very important US data due in the coming days – the September NFP report included – and incoming near-term information suggesting that US growth could be knocked down by as much as -0.4% thanks to the government shutdown (per Standard & Poor’s) – it is highly likely that the Fed will maintain its $85B/month QE3 into December.

The US Dollar is the worst performing currency as attention shifts from the US debt debacle to incoming Fed rhetoric, and bond markets may be leading the way. Taking a look at US Treasuries, the 2-year note yield has decreased to 0.310% (-2.0-bps), the 5-year note yield has decreased to 1.345% (-4.3-bps), and the 10-year note yield has decreased to 2.623% (-4.0-bps).

The US Treasury yield curve continues to flatten, which typically occurs when either slower economic growth is expected and/or additional monetary easing is forecasted. More importantly, the “belly” of the yield curve – 3- to 7-year notes – is seeing yields fall/prices rally faster than the short- or the long-end; the belly was hurt the most during the summer months as QE3 taper expectations built up.

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


Dollar_Dives_as_Focus_Moves_from_Debt_Deal_to_Incoming_Fed_Rhetoric_body_Picture_1.png, Dollar Dives as Focus Moves from Debt Deal to Incoming Fed Rhetoric

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--- Written by Christopher Vecchio, Currency Analyst

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