Markets post-US Government Shutdown

Forex News and Events:

The US government shutdown is the main theme of the day. As discussions on a potential US default by October 17th gain pace, the market reaction remains relatively soft. USD sales are registered across the board, yet the 10-year US government yields moved higher. In Europe, the weakness in economic data erased the earlier gains in EURUSD, while the Cable consolidates gains despite unexpectedly lower manufacturing PMI.

The afternoon focus is likely to remain on US government shutdown, with fx markets digesting events and readjusting positions accordingly.

US Government Shutdown

The US government began its partial shutdown at midnight for the first time since 1996, as House Republicans rejected to agree on budget unless it involved a delay in Obamacare. As many as 800’000 government workers are out of work today as the national parks, museums, and many essential government services are suspended with no time limit. The US government shutdown is not what primarily worries the markets. The most important question is how to avoid a US default by October 17th if the debt limit is not increased. USD globally sold-off post government shutdown. It is now possible that Friday’s nonfarm payrolls do not get released. Anyhow, the government shutdown wiped out the expectations on Fed tapering in the October meeting, thus shifting the impact of economic data on the sidelines.

Euro & Sterling in Reaction

The shutdown in US government and broad based USD sell-off triggered decent price action in EUR & GBP. EURUSD cleared resistance at 1.3555, triggering a stop rally to 1.3588 as soon as Europe walked in. Technical indicators got a fresh boost post-rally, however the weakness in economic data weigh on the Euro-complex.

The economic releases in the morning were rather disappointing. The German unemployment surged 25’000, while the markets were expecting a drop of 5’000. The final manufacturing PMI prints were mixed across the Euro-zone countries, yet the overall EZ PMI consolidated at 51.1 in line with expectations. The Euro-zone unemployment rate slightly improved from 12.1% to 12.0% in August but remains at the historical highs.

Across the English Channel, GBPUSD rallied to 1.6260 (the highest since January 2nd) after the US government shutdown. The pair extended gains through higher-high-higher-lows pattern for the sixth consecutive day. Despite the disappointing PMI release, the Cable sees buying interest above 1.6200, perhaps the inflating house prices (up the most since September 2007) is still seen as a good reason to remain on the long side of the play.

RBA’s Policy Verdict

As widely expected, the Reserve Bank of Australia kept the official cash rate unchanged at the historical low of 2.50%, yet the accompanying statement was surprisingly hawkish as the reference to further Aussie decline has been dropped. AUD was the biggest winner against USD among G10 currencies, AUDNZD surged as bets on diverging RBA and RBNZ expectations faded.

Moving forward, the drop in dovish RBA expectations are clearly AUD-positive and neutralize yesterday’s trend reversal. The bias has turned on the upside, the first levels in sight are 0.9460 and 0.9525 September high.

Today's Key Issues (time in GMT):

2013-10-01T14:00:00 USD Aug Construction Spending m/m, exp. 0.4%, last 0.6%
2013-10-01T14:00:00 USD Sep ISM Manufacturing, exp. 55.0, last 55.7
2013-10-01T14:00:00 USD Sep ISM Prices Paid, exp. 55.0, last 54.0
2013-10-01T16:00:00 EUR (IT) Sep New Car Registrations y/y, last -6.56%
2013-10-01T21:00:00 USD Sep Total Vehicle Sales, exp. 15.60M, last 16.02M
2013-10-01T21:00:00 USD Sep Domestic Vehicle Sales, exp. 12.10M, last 12.44M

The Risk Today:

EURUSD has rallied after a brief pause, as we expected , coming just a stone’s throw from our 1.3610 target (1.3588 high). With MACD firmly over the zero-line, trend and momentum indicators bullish and uptrend stable, our focus remains on 1.3610. With the US government in turmoil, any pullbacks to unwind overbought conditions would be a good time to reload longs. The first region of supply is located at a distant then 1.3610 (6th Feb high) then 1.3710 (2013 high). The next support can be found at 1.3480 (22nd Sept low), 1.3320 (17th Sept low), 1.3106 (6th Sept low), 1.2995 (10th July reaction high), 1.2963 (11th July low), 1.2877 (Fibonacci 50% retracement on Jul 12’ – Feb 13’ rally), then 1.2820 (20th May low).

GBPUSD bulls are well in control with patterns extending a series of new highs (5 days). With GBPUSD comfortably in an expanded uptrend channel , clearance of 1.6179 resistance, thin supply zones above and momentum indicators in bullish territory we remain bullish. We would buy on dips, with our next target 1.6343. Watch for next resistance to come into play at 1.6343 (2013 high). The support levels from here are 1.5956 (24th Sept pivot low), 1.5884 (17th September low), 1.5759 (17th June high), 1.5600 (resistance turned support), 1.5478 (200 dma), then 1.5468 (65 dma).

USDJPY is managing a wave of selling pressure as traders broadly liquidate USD longs. The daily cloud cover & uptrend floor at 97.69 was temporarily violated but the bulls were able to regain control (yet the pair remains heavy). Trend and momentum indicators are now bearish. We are sitting in the key bearish trigger and beak should extend weakness (next key support is at a distant 95.83). The first resistance region is located at 99.06 (27th Sept pivot high), 100.68 (11th Sept high), 101.50 / 68 (8th July high & Fibo lvl), 102.53 (29th May high),103.55 (16th Sep 08 & 30th Sep 08 low), then 105.00 (psychological resistance). On the downside, supports are located at 96.80 (sideways range top), 95.83 (6th June low), 93.57 (Fibonacci 61.8% on Sept 12’ – May 13’ rally), 92.56 (2nd Mar low & Fibo 38.2% retracement), 90.93 (25th Feb low).

USDCHF Not much has changed in USDCHF other than a slight bearish pause (despite strong PMI read today). USDCHF selling pressure remains after Fridays bearish move hit our 0.9023 target. With MACD in bearish territory and momentum indicators pointing lower violation of 0.9000 support should trigger further downside towards the next critical support level at 0.8934 . That said with RSI in slightly overbought territory we could see a slight recovery before heading lower. The first levels of support remains at 0.9000 (psychological support), 0.8934 (24th Feb low), then 0.8860 (Fibo 38% Aug 2011 to July 2012 retracement level). The next levels of resistance are located at 0.9131/40 (18th Sept low), 0.9450 (target), 0.9481 (range top), 0.9568 (fibo 61.8% on May-June drop), ), 0.9598 (11th July high), 0.9626 (31st May low & 3rd June low) then 0.9672 (fibo76.4% level on May – June drop).

Resistance and Support: