The shutdown of the US government and the uncertainty that it entails, and doubly so ahead of the looming debt ceiling, is a disruptive force, skewing the investment climate. Many medium and long-term investors have largely moved to the sidelines.
The US dollar has been generally weaker since the shutdown. The Australian dollar was the strongest currency against the US dollar over the past week. It rose by about 1.2%, yet it is often understood as the opposite of a safe haven, a risk asset. The yen has been the second strongest currency, appreciating by almost 0.85% against the dollar and is it usually perceived as a safe haven currency.
Sterling and the Swiss franc were the only majors to decline against the dollar last week. The former has had a stellar run and its 6.5% advance makes it the best major performer over the past three months. Profit-taking, arguably encouraged by three softer PMIs surveys, seemed to be the main culprit. Unwinding of the risk-off positions ahead of the week was behind the franc’s net loss on the week. The euro had been putting in higher highs against the franc since the start of the week, but franc weakness at the end of the week was more the driver than euro strength.
Although the closure of the Federal government and the approaching debt ceiling injects needless uncertainty and volatility (the VIX hit a 3-month high), investors seem to be looking beyond what is understood to be a short-run disruption. Of the four days that the government was shut last week, the S&P 500 rose in two of the sessions, including Friday’s.
Surveys and the price action suggests few are really taking very seriously the risk that the US actually defaults, even if the risk of such has increased; not of course because it has been locked out of the capital markets, but due to its political dysfunction. Pressure has been seen in the four week T-bills, which rose from about 2 bp at the end of last week to 13 bp ahead of the weekend. In comparison the 3-month bill yield rose to almost 3 bp from 1.
Previously we suggested the euro has potential toward $1.37.
The euro’s high on October 3 was just shy of $1.3650. While we do not want to read too much into the pullback ahead of the weekend, daily technical indicators such as the RSI and MACDs, are looking a bit stretched. It appears to be warning of the risk of a deeper near-term pullback. Initial support is seen near $1.3500. It may take a break of the post-FOMC low near $1.3460 to boost confidence that a high is indeed in place.
We peg initial support for sterling near $1.60, where the 20-day moving average is found. The post-FOMC low was set near $.1.5955 and this needs to be convincingly violated to support ideas that a top is being carved out. Bearish divergences are appearing in the daily RSI as the last week’s high in spot was not confirmed by the technical indicator. MACDs are crossing to the downside.
The yen’s technical outlook seem less clear. The dollar was sold to five week lows against the yen and the RSI and MACDs are trending lower. However, the 10-year interest rate differential has begun moving back in the US favor after falling about 30 bp in the aftermath of the FOMC. The close of the North American session above the 5-day moving average (~97.60 now) would strengthen our more positive dollar bias.
The technical outlook for the Canadian dollar is also not very clear. The RSI has turned down for the greenback, while the MACDs are turning up. The 5-day average has crossed above the 20-day average for the first time in nearly a month, but the US dollar appeared to run out of steam near CAD1.0355 at midweek and finished the week near the lows. Initial support is seen near CAD1.0250-70. The CAD1.0350-60 area looks like a reasonable cap.
We had anticipated a weaker Australian dollar, but the Reserve Bank surprised with its neutral statement. Several Australian banks have pushed out their rate cut forecasts into 2014. Technically, the Aussie looks poised to retest the post-FOMC high near $0.9530, which corresponded to the 38.2% retracement of the sharp decline that began in mid-April. The double bottom traced out in August suggests potential to push through $0.9600, while the next retracement objective is just above $0.9700.
The Mexican peso slipped marginally against the dollar since the US government shutdown. It managed to recover from the sharp drop on Thursday, which seemed to be more a function of a knock-on effect from the US, which reported a softer than expected service sector ISM and dramatic losses in US equities. At the week’s high, the dollar had risen 6% off the post-FOMC low. Disappointing US auto sales earlier in the week (weakest since April) also did the peso no favors. Initial support for the dollar is seen near MXN13.00-05.. We prefer to be patient and sell into a dollar spike toward MXN13.35-MXN13.40 At the week’s high, the dollar had risen 6% off the post-FOMC low.
The Federal government shutdown means the Commitment of Traders report from the CFTC is not available.
This piece is cross-posted from Marc to Market with permission.