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US shutdown not expected to last long

The world’s most liquid currencies appeared hesitant as political issues clouded the efficacy of government functioning in both the US and Italy. The last most significant move for the EUR/USD dates back to September 18, when we had the announcement that the Fed was not yet ready to embark on tapering. The news that day saw the EUR/USD rise by more than 160 pips as the USD ceded some of the support it had garnered on the back of Fed tapering expectations.

Since then, the EUR/USD stuck to a relatively tight range between 1.3462 and 1.3587 for the rest of September. Major US data remain in the limelight as investors continue to weigh the pace at which the US economic recovery seems to proceed.

At the end of this week, US payrolls data (that gauge the health of the US labour market) are expected to be announced. But early into Tuesday’s session news of a US Government shutdown raised concerns and initially weakened the USD as the US Congress failed to honour a deadline that could have averted the first partial shutdown since 1997.

This government shutdown means that most federal offices will be closed, although the critical functions such as the military will continue. This means that some data releases could be delayed. Commentators from Morgan Stanley estimate that the shutdown will cost the US 4th quarter GDP an annualised 15 basis point reduction for every week of shutdown – and that is why probably this shutdown should be over relatively shortly.

Seen on the daily charts it looks like the currency pair could be eyeing year highs around 1.37 levels in the short term, if it continues along the bullish trend line seen after July lows. At the time of writing, the currency pair is trading at 1.3561.

One word of caution here as the euro could slowly start looking more vulnerable with the political turmoil in Italy and as the ECB promises to be ready to deploy another round of Long Term Refinancing Operations (LTROs) to help bank finance.

In Italy Silvio Berlusconi’s PDL party resigned from the coalition government, leaving Prime Minister Letta to struggle to avoid fresh parliamentary elections. The vote of confidence was to take place on Wednesday.

Earlier this week, at its October 1 meeting, the Reserve Bank of Australia left interest rates on hold at 2.5 per cent, in line with expectations. The Australian central bank had opted to stay on hold as well in September and seems to be preparing the tracks for a change to neutral after the last rate cut dating back to August this year.

Commentators from Morgan Stanley estimate that the shutdown will cost the US 4th quarter GDP an annualised 15 basis point reduction for every week of shutdown

It looks as though in these last two meetings the RBA is signalling a shift in its current easing stance and has watered down its talk and emphasis on the scope for easing and on a high currency.

For the current year, seen against the US dollar, the Aussie has shed more than 14 per cent from open to year’s lows as the AUD/USD slipped from 1.03954 to 0.88483. Year’s lows were seen on August 5 this year.

With trading at 0.9394 at the time of writing, for the current week we are expecting the AUD/USD to the lower side to remain supported at 0.9257/0.9197, while to the upside price action should find resistance at 0.9416/0.9517.

In the former part of this week we have seen the price of gold collapse to $1287.02 after opening the week at $1342.65. Surprisingly enough, the yellow metal’s safe-haven appeal failed to impress investors despite the looming US issues.

The GBP started October on a strong footing as it pushed to fresh yearly highs when seen against the US dollar. The GBP/USD registered highs of 1.6260 last Tuesday, in a move that saw the GBP pare back all the losses made earlier this year against the USD.

On the day, UK PMI, a health check for the UK manufacturing sector, was confirmed at 56.7; albeit softer than the previous and expected readings the data still showed that UK manufacturing expanded in September and continued to reinforce evidence that the economic recovery is gaining momentum.

Upcoming FX key events
Today: EZ PMI services & retail sales, UK PMI services.
Tomorrow: EZ PPI index, US non-farm payrolls and unemployment rate.

Technical key points
EUR/USD is bullish, target 1.3700, key reversal point 1.3300. EUR/GBP is neutral. USD/JPY is neutral. GBP/USD is bullish, target 1.6311, key reversal point 1.5821. USD/CHF is neutral. AUD/USD is neutral. NZD/USD is neutral.

RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.

Rudolf Muscat is a senior trader at RTFX Ltd.

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