US debt default, China concerns hit risk — stocks, dollar slide

Global Resource Shortage Lift AUD, NZD; Asia/EMFX Slump

Summary: Concerns about a potential US government debt default, Chinese trade issues, and a huge Evergrande default hit risk appetite yesterday. Trading was thin with Australian and Chinese markets closed for official holidays. The Biden administration and US Democrats failed to convince opposition Republicans to raise the US 28.4 trillion debt ceiling which faces a historic default in 2 weeks. China’s financial stability faced fresh scrutiny following news that troubled property developer Evergrande will sell a majority stake of its property management business. The US Dollar finished lower against the major and resource currencies but was up versus most Asian and EMFX. Ongoing shortages in global resources (oil, coal, iron ore) boosted the Australian, New Zealand and Canadian Dollars. A popular gauge of the US Dollar’s value against a basket of 6 major currencies, the Dollar Index (USD/DXY) slid 0.18% to 93.80 from 94.07 (Friday). The Euro rallied against the Greenback to finish at 1.1622 from 1.1593 while Sterling soared 0.54% to 1.3613 (1.3543). Against the Japanese Yen, the Dollar dipped to 110.92 from 111.05. The Australian Dollar rebounded 0.48% to 0.7290 (0.7264) while the USD/CAD pair (US Dollar-Canadian Dollar) fell to 1.2580 from 1.2647. The Greenback was higher against most Asian and Emerging Market FX. USD/CNH (US Dollar-Offshore Chinese Yuan) jumped to 6.4500 from 6.4350. The USD/SGD pair however was little changed at 1.3570.

Wall Street stocks slumped on the US debt-ceiling impasse. The DOW finished 0.97% lower to 34,030 (34,367) while the S&P 500 was last at 4,307 (4,360), down 1.25%. The tech heavy NASDAQ tumbled 2%. Global bond yields were higher. The US 10-year treasury rate rose two basis points to 1.48%. Germany’s 10-year Bund yield was last at -0.22% from -0.23%.

Data released yesterday saw Swiss September CPI dip to 0.0%, against median estimates of 0.2%. Swiss Annual September Retail Sales rose 0.5%, against forecasts of 0.6%. Spain’s Unemployment Change eased to -76.1k from a previous -82.6k. The Eurozone Sentix Investor Confidence Index dipped to 16.9 in September from a previous 19.6, missing forecasts at 18.5. Canada’s September Building Permits fell to -2.1%, missing median expectations at +3.3%. This morning, Australia’s AIG Construction Index rose to 53.3 in September from a previous 38.4.

• EUR/USD – The Euro extended its rally against the US Dollar, edging 0.26% higher to 1.1622 from 1.1593. Overnight the EUR/USD pair traded to a high at 1.1640. Broad-based US Dollar weakness has buoyed the shared currency in the past couple of trading sessions.
• AUD/USD – Led by the rally in resources, the Aussie Battler rebounded 0.48% to 0.7290 from 0.7265 on Friday. Overnight, the AUD/USD pair soared to 0.7304 before easing to its New York close.
• USD/JPY – The Greenback eased against the Yen to 110.92 from 111.05. With risk appetite waning due to concerns on the US debt extension as well as Chinese financial issues, the Yen attracted haven support.
• GBP/USD – Sterling reversed its slide last week, soaring 0.54% on Monday to finish at 1.3613, up 0.54% from 1.3543 on Friday. Overnight the GBP/USD pair hit a peak at 1.3640. Short-covering and the overall weaker Greenback boosted the British currency.

On the Lookout: Today’s economic calendar picks up. Australia reports its Commonwealth Bank (CBA) Services PMIs for September (f/c 44.9 from previous 44.9). Japan follows with its Annual Tokyo Core CPI report (f/c 0.2% from 0.0% -ACY Finlogix). Chinese markets are absent as the country continues to celebrate its Golden Week holidays. Bank of Japan Governor Haruhiko Kuroda is scheduled to speak in Tokyo today. Australia releases its ANZ Job Advertisements for September (no f/c, previous was -2.5%), Australian August Trade Balance (f/c +AUD 10.65 billion from previous +AUD 12.117 billion – ACY Finlogix), Australian August Retail Sales (f/c -1.7% from -2.7%). The RBA meets on its Cash Rate (f/c 0.10% from 0.10%) and issues its RBA Rate Statement following. Japan releases its Jibun Bank Services PMI for September (no f/c, previous was 42.9). European data kicks off with France’s August Industrial Production (f/c 0.4% from 0.3%), French Final September Services PMI (f/c 56 from 56.3 – ACY Finlogix), Italy reports its September Services PMI (f/c 56.5 from 58.0 – ACY Finlogix), German Final Services PMI for September (f/c 56 from 60.8 – ACY Finlogix), Eurozone Final Services PMI for September (f/c 56.3 from previous 59), UK Final September Services PMI (f/c 54.6 from 56.0 – ACY Finlogix). Eurozone August PPI follows (m/m f/c 1.3% from 2.3%). Canada starts off North American data with its August Trade Balance (f/c +CAD 0.35 billion from previous +CAD 0.78 billion – ACY Finlogix). The US rounds up today’s reports with its September Final Services PMI (f/c 54.4 from 55.1), US August Trade Balance (f/c -USD 70.5 billion from previous -USD 70.0 billion – ACY Finlogix), US ISM Non-Manufacturing PMI for September (f/c 60 from 61.7 – ACY Finlogix).

Trading Perspective: Last week the Commitment of Traders CFTC report on speculative FX positioning saw markets increase its bullish bets on the US Dollar in September. The total net speculative USD long position (28 September) was at its highest since the final week of February 2020. The past two trading days (end of month September on Friday, and Australian holiday yesterday) saw a paring of those speculative net USD longs. We can expect Asia to continue that trend first up today. The ongoing US debt drama will also weigh on the Greenback. However, one should be wary that US yields are heading higher, not lower. An interesting start to another week in the world of FX.

• EUR/USD – The Euro extended its climb from Friday to settle at 1.1622 from 1.1593 on Friday. Yesterday, the EUR/USD pair traded to an overnight low at 1.1563 which also was Friday’s low. For today, immediate support for the shared currency lies at 1.1600 followed by 1.1570. The 1.1560 level is strong support. Immediate resistance can be found at 1.1640 (overnight high). The next resistance level lies at 1.1670. Look for an initial drift higher in Asia today. Likely trading range 1.1600-1.1670.
• AUD/USD – The Australian Dollar’s rebound extended yesterday, finishing up 0.48% to 0.7290 (0.7264 Friday). The Aussie Battler soared to an overnight high at 0.7304 before easing to its New York close. For today immediate resistance is found at 0.7305 followed by 0.7325, and 0.7355. Immediate support can be found at 0.7285 and 0.7255 (overnight low traded was 0.7251). The slump in global energy prices has boosted the Aussie, as well as net short speculative bets. Look for consolidation in a likely trading range today of 0.7270-0.7320. Just trade the range shag on this one today.

(Source: Finlogix.com)

• GBP/USD – Sterling soared 0.54% to 1.3613 in late New York from its 1.3543 open on Friday. The Pound benefitted from short-covering and broad-based US Dollar weakness. Overnight high traded for the British Pound was at 1.3640. For today immediate resistance lies at 1.3640 followed by 1.3660 and 1.3690. Immediate support can be found at 1.3585 and 1.3555, 1.3525. Overnight Sterling had a choppy session between 1.3516 and 1.3640. For today look for consolidation in a likely trading range of 1.3575-1.3645.
• USD/JPY – The USD/JPY pair dipped to 110.92 from 111.05 overnight. Higher US bond yields were supportive of the USD/JPY pair despite a lower Greenback against the other majors. For today, we can find immediate resistance at 111.15 followed by 111.35 and 111.65. Overnight high for the USD/JPY pair was at 111.30. The overnight low traded was at 110.820. Immediate support lies at 110.75 followed by 110.55 (strong). Look for this currency pair to consolidate in a likely range today of 110.70-111.40. Just trade the range shag on this one.