The United States government bought itself more time after lawmakers in Washington struck an 11th hour deal to lift the debt ceiling and end a 16-day partial shutdown of the Federal government. In the end the deal averted what might have been a catastrophic default for the US, but many analysts see Congress simply kicking the can up the road as the crisis could come back to haunt them early next year.
Indeed, the deal announced by the Senate last week only offered a temporary fix and still didn’t resolve issues such as spending and deficits which divide Democrats and Republicans.
Global markets greeted the news with euphoria. Wall Street shares surged near all-time highs and the S&P 500 closed the week at its highest close. Investors rushed towards riskier assets and the dollar plunged. Safe haven currencies were under pressure as forex investors favored riskier currencies.
Despite market participant’s enthusiasm for the deal, many still believe that the system is broken. Nevertheless, it gives lawmakers more time to forge a more permanent solution and avert the unthinkable.
America’s global partners weren’t exactly blown away by the deal either. China, the US’ largest overseas creditor said Washington politicians had done nothing substantial but postpone once again. The deal did, however, shift the focus away from the whole debt ceiling saga, at least for the next couple of months. The attention now was back on monetary policy and more specifically the Federal Reserve and the timing of the highly anticipated Fed tapering.
Because of the government shutdown, and due to many agencies being closed, the jobs report from the world’s largest economy for September was not released. With the government back to business this week, the widely watched change in non-farm payrolls was announced on Tuesday.
The NFP figure for September was much lower than expected, at 148k versus a forecast for 180k and down from a revised 193k. The jobless rate fell to 7.2 per cent from 7.3 per cent but the change in private payrolls also rose much less than expected, by 126k against 180k. The data added speculation that Fed Chairman Bernanke will delay easing the pace of the quantitative easing programme.
The Bloomberg US Dollar Index fell towards an eight-month low while EUR/USD jumped to a new yearly high by 1.3748, surpassing the February 1 high of 1.3710. Demand for riskier currencies soared with the Japanese yen on the receiving end, and carry trades were extremely bullish. EUR/CHF rose to 1.2364 and USD/CHF fell to 0.8964, its lowest since February 2012.
EUR/JPY surged to its highest since November 2009, by 135.36. USD/JPY overcame an initial dip immediately after the data. The pair fell to 97.88 but immediately recovered to a session high by 98.48.
The Aussie was one of the strongest performers at the start of the week, and continued its advance following the NFP report. AUD/USD rose to a four and a half month high on Tuesday, by 0.9721. The Aussie also continued to edge away from its five-year high against the kiwi. It rallied against its neighbouring rival amid bets that the Reserve Bank of Australia will refrain from cutting interest rates further, putting a stop to a policy divergence between the two monetary authorities. AUD/NZD was up to 1.1445 on Tuesday. RBA officials, including Governor Glenn Stevens said they don’t see any need for any further reductions in the benchmark rate.
Cable was also pushed higher against the greenback, as it continued its uptrend. GBP/USD was up to 1.6212, within sight of a 10-month high by 1.6260.
Upcoming FX Key events:
Today: EZ PMI, US initial jobless claims & US new home sales.
Tomorrow: German Ifo, UK GDP, US durable goods orders & US Michigan consumer sentiment.
Technical Key points:
EUR/USD is bullish, target 1.3870, key reversal point 1.3300.
EUR/GBP is neutral.
USD/JPY is bullish, target 103.70, key reversal point 92.50.
GBP/USD is bullish, target 1.6400, key reversal point 1.5700. USD/CHF is neutral.
AUD/USD is bullish, target 0.9900, key reversal point 0.8850.
NZD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.