The USD has edged lower through the European morning, bond yields have edged further down while equity indices are broadly flat. EUR/USD has edged up over the 1.37 level to a peak of 1.3704 so far. The high for the year was 1.3711 back on 1st February. GBP/USD is back over 1.62.
The USD has softened significantly since US politicians ended the fiscal impasse. While we initially expected a relief rally in the USD, the dominant theme since the political agreement was made is that the short-term nature of the deal could again cause the Fed to delay its tapering of its asset purchases. Reflecting this theme, US 10-year government bond yields have fallen by 20 bps to 2.55% over the past couple of days. One of the reasons the FOMC did not begin the process of tapering its asset purchase program back in September was the looming US fiscal issues. The concerns in September have proved to have been well placed, now that we have seen the inability of politicians to avoid a shutdown. The fiscal impasse could easily be repeated next year, and this will influence the FOMC’s thinking at its upcoming meetings. The irony of this is a select group of US politicians are heavily influencing monetary policy. How long can this distraction be tolerated by the Fed? What happens if the Jan-Feb fiscal agreement is delayed until May-June? Does the Fed keep delaying? In the end, the deciding factor must be the economic data and Fed independence.
Fed speakers have sounded cautious since the end of the impasse. Fisher, who has regularly called for winding back stimulus said the political situation has undermined the reasons for tapering. Fisher’s view expressed yesterday was to “stay the course” of current policy settings at the 29-30 October meeting. Following the September Fed decision, we pushed out our expected timing for the Fed to taper its asset purchases to the FOMC’s 17-18 December meeting. The December meeting will include a new set of US economic forecasts and Chairman Bernanke will hold his final press conference to explain the FOMC’s policy decision. Accordingly, if the Fed gains some confidence in the fiscal situation, we think the December meeting remains the logical meeting to announce a start to asset purchase tapering. However, a significant risk is the Fed will want to take a more cautious approach and wait to see how the politics play out over December and January before tapering asset purchases. We note the fiscal concern was only one factor behind the FOMC decision in September. The most important factor for the Fed to consider over the coming months is the strength of the economy. In this vein, the end of the shut-down also means economic dataflow can resume. Upcoming Fed speakers, and US data over the coming fortnight will be critical to forming a view on the Fed outlook, as well as a view on near-term USD direction. But the strongest guidance will come from Chairman Bernanke at the 29-30 October meeting.
With the US government re-opened, the Bureau of Labor Statistics has confirmed it will release the September non-farm payrolls on Tuesday 22 October, the October non-farm payrolls on Friday 8 November and the September CPI on 29 October. The Fed’s next meeting on 30 October is unchanged (we expect no policy change). The US Bureau of Economic Analysis has not yet updated their release dates for Q3 GDP, August international trade and September personal income and spending.
In the wake of yesterday’s USD reaction, AUD/USD has touched its highest level since mid-June reaching 0.9677 so far this morning. A solid batch of Chinese data today, which all printed on expectations, have helped. The Q3 GDP acceleration (+2.2%QoQ) from upwardly revised 1.9% rate in Q2 growth points to a modest upside risk to our 2013 forecast of 7.6%. The lack of anything substantively new from Governor Stevens in his speech today, combined with firm Chinese data and near-term USD softness suggests AUD/USD can grind towards 0.9760 (200-day moving average). But right now it appears AUD is consolidating some of its recent move higher. More details on the Chinese data are in the attached note from our Asian Currency Strategist Andy Ji.
USD/JPY remains heavy after the USD softened yesterday and has dipped to 97.60 so far this morning. Technically, USD/JPY appears to be in a narrowing range. We anticipate USD/JPY can soften further in the short-term down to the 200 day moving average of 0.9714. But we anticipate a break higher in USD/JPY out of the current technical pattern and driven by both a USD recovery and a weaker JPY. A strategy of buying longer-dated (two-month) vol. in USD/JPY may prove fruitful if we are right about the eventual break higher in USD/JPY.
USD/CAD is now back trading around 1.0300, where it was for most of late September and early October before the US fiscal concerns intensified. Today’s data highlight is Canada’s September CPI reading. With plenty of slack still remaining in the Canadian economy, core inflation pressures are expected to lift only modestly over the year ahead, and another benign inflation print today is unlikely to have a lasting impact on USD/CAD.
Upcoming Economic Calendar Highlights Important for Exchange Rates
USD – Non-farm payrolls (Tuesday), FOMC meeting (30 October), US retail sales (release date unknown).
AUD – Q3 CPI (Wednesday).
EUR – Advanced October PMIs (24 October).
GBP – Minutes from BoE policy meeting (Wednesday), Q3 GDP (25 October).
NZD – RBNZ Official Cash Rate review (31 October).
CAD – September CPI (today), Retail sales (Tuesday), BoC policy meeting (Wednesday).
JPY – BoJ policy meeting (31 October).