USD slips, market jitters rise – Scotiabank

Markets are ending the week of a bit of a sour note. The USD has been clipped back somewhat in overnight trade as investors ponder a looming US government shutdown. Talk amongst US lawmakers about suspending or removing the debt ceiling has not worried US Treasurys unduly but investors do appear to be paying a bit more attention to the risk of (more) fiscal slippage in the US ahead. Volatility is elevated and stocks are wondering where the Santa Clause rally has gone in all of this, Scotiabank’s Chief FX Strategist Shaun Osborne reports.

USD edges lower as markets ponder shutdown

“Beyond this week’s losses of around 3% for the major markets, there has been a worrying slide in market breadth in NYSE stocks, with less than 50% trading about their 200-day MA. The JPY and the CHF are the top performers on the day, suggesting some demand for havens into the weekend. Japan’s November CPI rose in November, as expected, reaching 2.9%, from 2.3%. Japanese monetary officials expressed “deep concern” about the recent weakening in the currency. The AUD is a relative underperformer on soft iron ore prices.”

“US Personal Income and Spending data are expected to reflect healthy levels of consumption in November. Data will likely show PCE inflation edging up last month in core and headline terms—to 2.9% (from 2.8%) and 2.5% (from 2.3%) respectively. Sticky PCE data will support the outlook for the Fed to remain on hold in the near-term at least. Markets are pricing in significantly less than 50bps of Fed easing over the coming 12 months.”

“Firm US yields will support the USD in the longer run but overnight price action does suggest the risk of some short-term weakness in the dollar broadly in the short run after the DXY nudged above 108.50 in overnight trade. The Fed’s blackout is over; Daly and Williams are speaking today; expect a repeat of the cautious messaging on the policy outlook.”