Debt ceiling fight is center stage, not data

Investors kicked off the week with renewed demand for U.S. assets. The Dow Jones Industrial Average rallied for the fifth straight trading day while the U.S. dollar strengthened versus the euro, Japanese Yen and Swiss Franc. Ten year Treasury yields also hit 1.5% intraday, which kept the dollar bid throughout the NY session. After last week’s busy economic calendar, data will take a backseat to central bank speak and the debt ceiling fight on Capitol Hill. 
 
For now, market price action reflects little concern as investors grow numb to government shutdown threats. Votes on the infrastructure spending bill and a stop gap measure to prevent government funding from expiring on September 30th could still derail the rally. We expect investors to take their cue from developments in Washington and comments from U.S. policymakers this week. Fed Chairman Powell, ECB President Lagarde and Treasury Secretary Yellen are scheduled to speak along with a number of Fed Presidents.
 
Comments from central bankers are unlikely to alter the market’s expectations for U.S. or Eurozone monetary policy. The Fed made it very clear that they are ready to begin tapering asset purchases and this outlook should sustain demand for U.S. dollars. The European Central Bank reduced PEPP purchases but even with the decrease, they will lag behind the Fed. Monetary policy divergence and disappointment over the German election explains why euro underperformed the dollar today.
 
All other high beta currencies traded higher against the greenback with the Australian dollar and British pound leading the gains. The Australian government laid out a plan for COVID-19 “Freedom Day.” This third stage of reopening will begin as early as October 11th for cities like Sydney when the vaccination hits 70%. Neighboring state Victoria has not yet provided a reopening date, but the move by New South Wales is a bright light shining at the end of the tunnel. If all goes as planned, Australia, which is poised to contract in Q3 looks forward to a strong robust fourth quarter recovery. Unfortunately tonight’s retail sales report will reflect the economic pain of August lockdowns.
 
Sterling seemed unfazed by cautious comments from Bank of England Governor Bailey. He reiterated the central bank’s view that inflation is transitory and warned that the rate of recovery is slowing. The New Zealand and Canadian dollars extended their gains with loonie supported by oil prices, which hit a 3 year high. The Japanese Yen and Swiss Franc traded lower as risk appetite improved.