The Big Picture

Tomorrow is the day you are worrying about today: Rarely have I seen such a confluence of independent crises. In the US, the government is about to shut down at midnight local time unless some miracle happens. Does that make it more or less likely that they can reach an agreement to raise the debt ceiling by the time the money runs out on Oct. 17th? We don’t know. In Europe, the Italian government is near collapse after former PM Berlusconi pulled his ministers from the Cabinet. PM Letta said he will request a confidence vote for Oct. 2nd to try to save his administration and avoid the need for another election, but in the meantime, this adds to the uncertainty on this side of the Atlantic while German Chancellor Merkel is trying to put together a coalition as well. In Japan, the government is planning to announce on Tuesday an increase in the consumption tax to 8% from 5% to help fix the country’s long-term fiscal problems, coupled with a stimulus package to offset the short-term deflationary impact.

With such a risky background, it’s no surprise that the dollar is opening lower against CHF and JPY, the two usual “risk off” trades in G10. The dollar gained against AUD and SEK however as well as most EM currencies as the high-beta trades fell back. Note how on Friday EUR/USD moved higher despite the absence of any EUR-positive news. This was probably due to Swiss National Bank intervention on the EUR/CHF exchange rate. As the SNB slows the fall of EUR/CHF but not USD/CHF, EUR/USD naturally rises. The same effect today is likely to push EUR/USD higher, in my view, as I would expect safe-haven inflows into CHF and JPY to continue.

In addition to the political problems, we have a very busy calendar of economic events this week. The highlights will be three central bank rate decisions (Australia on Tuesday, Eurozone on Wednesday and Japan on Friday), the Bank of Japan’s tankan short-term survey of economic conditions plus the manufacturing PMIs from many countries on Tuesday, and the US non-farm payrolls on Friday (assuming that the government doesn’t shut down. If it does, the NFP will probably be delayed).

Much of the action will occur during the European night. In Japan’s tankan survey for Q3, the large manufacturers’ DI is forecast to rise to 7 from 4 with the forecast for Q4 expected to be 10. That’s a sign of diminishing expectations in Japan; when the June tankan came out, the forecast for September was 10. It remains to be seen however whether any negative effect from the tankan outweighs any positive effect from the stimulus package, or indeed whether Japanese or global factors dominate trading in JPY. I suspect global factors will dominate and JPY is likely to strengthen temporarily regardless of domestic events.

Next is China’s official manufacturing PMI for September. It’s expected to rise to 51.6 from 51.0, although the final HSBC/Markit manufacturing PMI for September announced this morning was revised down to 50.2, below the preliminary figure of 51.2 and up only 0.1 point from August. Another limited rise would continue to depress AUD.

Then the RBA meets. No one looks for a change in rates, but rather the focus will be on whether any change in their bias will be evident in the statement. At the September meeting, the statement dropped the phrase “some scope to ease policy further” that it had included previously, leading the market to believe that the RBA had shifted to a neutral stance. However the minutes of the meeting revealed that members agreed “the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them.” This suggested that they retained their easing bias, insofar as there was no mention of raising rates, either. Comments that a further decline in the exchange rate would be “helpful” also indicated that the bias remains towards easing. They could make further comments about the exchange rate, seeing as AUD/USD has risen slightly to 0.93 from 0.90 before the September meeting. AUD has been declining ahead of the meeting and there is the possibility of a “sell the rumor, buy the fact” reaction, but I expect the RBA to make some concrete statement reaffirming its easing bias and for AUD to weaken further as a result.

As for the European/US day, in the Eurozone, the CPI for September is expected to have slowed to 1.2% yoy from 1.3% yoy -- well below the ECB’s target rate but not far enough below to get them worried about deflation (yet). German retail sale are expected to rise in August by 0.8% mom, a turnaround from a revised -0.5% mom in July. UK mortgage approvals are expected to rise to 61.0k in August from 60.6k. Later in the day, Canada’s GDP is expected to be up 0.5% mom in July, a turnaround from a 0.5% mom decline in June. In the US, the Chicago purchasing manager’s index is forecast to be slightly up for September (54.3 vs 53.0). Soon afterwards, the Dallas Fed Manufacturing activity is coming out; no forecast is available.

The Market

EUR/USD

• EUR/USD moved higher Friday but on Monday opened the European session with a bearish gap. The pair is trading in a short term sideways range between the support level of 1.3461 (S1) and the resistance of 1.3564 (R1) since the Sept. 18th. Both the RSI and the MACD oscillators lie at their neutral levels, confirming the consolidative mood of the price action. Therefore, in my opinion, we should wait of a clear break out of the sideways range in order to determine the forthcoming direction of the pair.

• Support is identified at 1.3461 (S1), 1.3400 (S2) and 1.3321 (S3) respectively.

• Resistance levels are the level of 1.3564 (R1), followed by 1.3655 (R2) and 1.3706 (R3) (daily chart).

USD/JPY

• USD/JPY also opened the session with a bearish gap, breaking below the 97.87 level (Friday’s support). At the time of writing the rate lies slightly below that level, and if the bears are strong enough to continue their momentum, I expect them to target the well-tested level of 97.00 (S1). The MACD oscillator supports the notion, since it lies below both the zero and its trigger lines. Furthermore, I believe that the short term trend of the pair has reversed to a downtrend (lower highs and lower lows) as it is confirmed by the blue trend line and by the bearish cross of the 20-period moving average below the 200-period moving average.

• Support levels are at 97.00 (S1), followed by 96.38 (S2) and 95.81 (S3).

• Resistance is identified at 97.87 (R1), followed by 98.53 (R2) and 99.15 (R3). The latter one is found from the weekly chart.

EUR/GBP

• EUR/GBP also opened the European morning with a gap to the downside, breaking below the 0.8356 level (Friday’s support). Currently the rate is trading slightly below that level and if selling pressure continues to push the pair lower, extensions should be triggered towards new short-term lows. Our studies confirm the bearish attitude of the pair, since the 20-period moving average lies below the 200-period moving average and the MACD’s value is negative, also below its trigger.

• Support levels are identified at 0.8319 (S1), 0.8273 (S2) and 0.8224(S3). All are found from the daily chart.

• Resistance is found at 0.8356 (R1), followed by 0.8418 (R2) and 0.8462 (R3) respectively.

Gold

• Gold moved higher during Friday’s trading activity, breaking above the resistance level of 1335 (current support). Early Monday European time, the precious metal lies slightly above that level. If the longs manage to maintain their momentum, they should drive the battle towards the next hurdle at 1368 (R1). The MACD oscillator poked its nose above the zero line, indicating bullish momentum.

• Support levels are at 1335 (S1), followed by 1316 (S2) and 1291 (S3).

• Resistance is identified at the 1368 (R1) level, followed by 1394 (R2) and 1415(R3).

Oil

• WTI managed to break the critical barrier of 102.23 (Friday’s support) and is now heading towards the 100.72 (S1) support level, where a downward violation should target the barrier of 99.18 (S2). Moreover, the 20-period moving average lies below the 200-period moving average and alongside with the negative value of MACD, they increase the probabilities for the continuation of the downward bias.

• Support levels are at 100.72 (S1), 99.18 (S2) and 98.00 (S3). Identified on the daily chart.

• Resistance levels are at 102.23 (R1), followed by 103.53 (R2) and 104.40 (R3).

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY