The potential economic impact of the stand-off between President Obama and Congress worsens

By Ian Dobbs*:

Over the last week the financial markets have been dominated by the debacle of the US Government shutdown.

As the stand-off between President Obama and Congress continues, the potential economic impact worsens. Both the fragile US and wider global economic recoveries do not need this type of variable.

It seems likely that an agreement will be made at some point in the coming week. Until such time, US governmental economic indicators have been suspended as part of the wide reaching shutdown.

The markets will likely see lower levels of liquidity as a result, and a corresponding lack of direction.

The potential for volatility increases the longer the situation remains unresolved, and as expected debt ceiling is reached on the 17th of October.

Major Announcements last week:

·  Canadian GDP +.6% as expected

·  Chinese Manufacturing PMI 51.1 vs 51.6 expected

·  Australian Retail Sales +.4% vs +.3% expected

·  UK Manufacturing PMI 56.7 vs 57.5 expected

·  US Manufacturing PMI 56.2 vs 55.3 expected

·  UK Construction PMI 58.9 vs 60.1 expected

·  NZIER Business Confidence 38 vs 32 previous

·  RBA leave monetary policy unchanged as expected

·  ECB leave monetary policy unchanged as expected

·  BOJ leave monetary policy unchanged as expected

NZD/USD

The New Zealand dollar has been locked in a range of 0.8250 to 0.8350 for much of the past two weeks. A brief dip to 0.8200 in the early part of last week was quickly reversed on the back of RBNZ Governor Wheelers warning of potential interest rate hikes. Since then we have seen sideways action with all the focus on the mess that is US politics. The risks around the stalemate grow day by day. A short term shutdown (i.e less than two weeks) will have little lasting impact, but if an agreement isn’t reached on raising the debt ceiling within the next nine days the market will start to react. So far the lack of wild moves in the USD reflects the belief that an agreement will be reached on the debt ceiling. Only time will tell if that belief is misplaced. Until then expect more trading within the current range.

NZD/AUD (AUD/NZD)

This pair has been relatively quiet since big swings on Tuesday and Wednesday last week. Those swings were driven firstly by the RBA statement, then by comments from RBNZ Governor Wheeler, but since then the pair has settled into trading comfortable around 0.8800 (1.1364). Business confidence data from New Zealand this morning had little impact, as should the manufacturing index on Thursday. Data from Australia this week could well influence the cross however with consumer sentiment and the more important employment numbers set for release on Wednesday and Thursday respectively. The topside is protected by now strong resistance towards 0.8925 (support 1.1205) and any move toward there will run into plenty of selling. Key downside support comes in at 0.8740 (resistance 1.1442) and these two levels look set to contain trade in the near term.

NZD/GBP (GBP/NZD)

With little in the way of market moving data out of either country over the last few trading days this pair has been driven solely by market flows. To that extent the UK Pound came under some pressure on Friday evening as a rumored large sell order went through the market. That caused the cross to the New Zealand dollar to rally sharply touching a 0.5198 high (1.9238 low). With no fundamental data backing the move, and the ‘flow’ having washed through the market, the pair proceeded to retrace much of those gains in the early part of this week. Over the coming days we do get some fundamental data out of the UK that could well influence the pair. Tomorrow night we get manufacturing and industrial production, then on Thursday night it’s the BOE rate decision. However none of this is likely to provide enough momentum to break the pair from its now well-defined 0.5000 to 0.5250 range (1.9048 to 2.0000).

 NZD/CAD

This pair remains in an increasingly familiar range that has established itself over the last three weeks. Not even the news of the huge Petronas Canadian investment has materially impacted pricing. Expect the rangey nature of the price action to continue in the short term as the US Government funding debacle plays itself out. Any foray up towards .8600 provides a great opportunity to buy great value CAD with NZ dollars. After today’s expectedly solid NZ business confidence numbers, expect the Canadian employment numbers on Friday to provide the data focus for this pairing. With the RBNZ expected to initiate its cash rate hiking cycle in early 2014, the NZD will likely find support on any dips towards the support at .8450 in the short term.

NZD/EURO (EURO/NZD)

There has been little overall direction in this pair for much of the past two weeks. 0.6060 to 0.6160 (1.6234 to 1.6502) has contained price action since the 24th of September. The cross is currently bang in the middle of that range, and with little in the way of key data from NZ over the rest of this week the driving force will need to come from Europe. ECB president Draghi is set to speak on Thursday and Friday and his comments will be closely watched. Ahead of that we get German trade balance, factory orders, and industrial production. We also have French industrial production on Thursday along with the ECB monthly bulletin.

 NZD/YEN

Although a little choppy over the past week, this pair has seen a small downside bias as the Yen is gradually outperforming the New Zealand dollar. The highs reached last week after RBNZ Governor Wheeler’s comments were short lived and the cross quickly traded back down towards 80.50. Since then the pair has lost more ground and looks likely to test 80.00. Weakness in the pair is mostly on the back of strength in the Yen that has emerged as the preferred haven for investors worried by the stand-off in US debt ceiling talks. There has not yet been a general flight from risk currencies such as the NZD, but that could eventuate as the Oct 17 default deadline approaches. In the event of a default we could easily see a combination of weakness in the NZD and further strength in the Yen that would cause the cross to tumble. All eyes remain on Washington.

AUD/USD

There has been little to drive the Australian dollar since mid last week. A dip below 0.9350 after softer than expected building approvals and trade balance data was quickly reversed and the currency headed into the weekend testing resistance around 0.9450. So far that level has capped the topside and it may well continue to do so with all the focus on the political impasse in Washington. Developments there over the coming week will be key to near term direction. We also have consumer confidence and employment data from Australia to throw into the mix over the coming days. There is solid downside support towards 0.9300 while the topside is protected by resistance around 0.9450 and then again at 0.9525.

AUD/GBP (GBP/AUD)                            

After a dip to 0.5750 (rally to 1.7391) last Wednesday in the wake of soft building approvals and trade balance data, the Australian dollar has seen substantial appreciation against the UK Pound. Some of this was on the back of a recovery in the AUD off those post data lows, but a good chunk of the move came on Friday evening as a rumoured large sell order hit the GBP. That flow kept the GBP on the back foot into the weekend and saw the cross trade as high as 0.5892 (low as 1.6972). However, with little in the way of fundamental news backing the GBP move, the market has retraced some of those gains and the pair now trades back towards 0.5850 (1.7094). Any further potential strength will run into solid resistance towards 0.5930 (support towards 1.6863) and this should cap price action in the near term. Key releases to watch for this week will be Australian employment data on Thursday, followed by the BOE rate decision later that evening.

AUD/EURO (EURO/AUD)

Trading in this pair has been range bound for much of the past two weeks. 0.6870 to 0.6970 (1.4350 - 1.4556) has contained most of the price action. Late last week we saw the top of this range under pressure as the Australian dollar outperformed the Euro to a degree, but in the early stages of this week the AUD has retraced some of those gains. Expect more of the same range bound activity ahead of key Australian employment data on Thursday. From Europe ECB president Draghi is set to speak on Thursday and Friday and his comments will be closely watched. Ahead of that we get German trade balance, factory orders, and industrial production. We also have French industrial production on Thursday along with the ECB monthly bulletin.

AUD/YEN

The past week has seen mostly sideways action in this pair with dips below 91.00 proving short lived. However, the topside is also tough going with most of the price action being capped by resistance around 92.00. As the stalemate in Washington drags on the risks for this pair are to the downside. The Yen is emerging as the favourite safe haven play for investors and with any deal looking a long way off further Yen strength seems likely. Things could get very wild if the US fails to reach an agreement on the debt ceiling by Oct 17. We could then see a flight from risk currencies, such as the AUD, and this would combine with further Yen strength. If that were to happen we would see sharp losses for this pair. Until then the market will be a little wary and the small downside bias will dominate. We do get key Australian employment data on Thursday to digest as well.

AUD/CAD

The AUD saw periods of increased demand against the CAD last week. The US Government funding debacle will have undermined the CAD to a certain extent, and eased the way for the AUD move higher. However, the resistance at .9750 managed to contain the AUD appreciation. The Petronas CAD investment news is significant (36 billion CAD worth), but the impact has been limited so far. After todays Australian business confidence numbers, the respective employment data provides the focus for the remainder of the week. Expect the range bound price action to continue in the short term at least. Certainly with the interbank level above .9700, current levels look to offer good value buying of CAD.

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Market commentary:

Over the last week the financial markets have been dominated by the debacle of the US Government shutdown. As the stand-off between President Obama and Congress continues, the potential economic impact worsens. Both the fragile US and wider global economic recoveries do not need this type of variable. It seems likely that an agreement will be made at some point in the coming week. Until such time, US governmental economic indicators have been suspended as part of the wide reaching shutdown. The markets will likely see lower levels of liquidity as a result, and a corresponding lack of direction. The potential for volatility increases the longer the situation remains unresolved, and as expected debt ceiling is reached on the 17th of October.

Australia

With a bank holiday yesterday it has been a quiet start to the week for Australia. The only data that has been released since last Wednesday’s weaker than expected building approvals and trade balance has been business confidence figures. They came out in the last couple of hours and showed a solid gain to the best level since March 2011. Tomorrow we get consumer sentiment figures and on Thursday the more important employment data is set for release.

New Zealand

Yesterday’s release of the Crown’s year-end financial statements made pleasant reading. The operating deficit of $4.4 bln was lower than the budget forecasts, and Bill English said the government remains on track to return to surplus in 2015. He also said the New Zealand dollar was too high and is hampering exports. He may be right, but his comments had little impact. What could have an impact was his revelation that the government is set to make a significant announcement on housing later this week. It remains to be seen just what the government is going to come up with, but if it is ‘significant’ and helps to cool the property market then that could well have implications for the future path of interest rates. That would then undermine some of the support the NZD has gained since RBNZ governor Wheeler’s comments last week. Earlier this morning we got the Quarterly Survey of Business Opinion (QSBO) data. It showed that business confidence and activity are improving and this is slowly being realised into more jobs and better profits. The survey is consistent with around 3% annual GDP growth. The only other data this week is the Business NZ manufacturing index out on Thursday.

United States

All the focus in the US continues to be on the stalemate in Washington. Key US employment data that was due out on Friday has been delayed as a result of the Government shut down and there has been little else in the way of market moving data released. But with Democrats and Republicans voting together to retroactively pay the 800,000 furloughed workers it’s now more of a forced paid holiday than a real shutdown. There is no end in sight with both sides digging their toes in and things won’t get really serious for another nine days when the debt ceiling is reached. The longer this debacle goes on the less chance there is of any Fed tapering in the near term. As far as I am aware we are still going to get the minutes from the last Fed meeting on Thursday, and Friday see consumer sentiment hit the wires.

Europe

With political instability in Italy out of the way, thanks to the demise of Berlusconi, Europe has fallen from the headlines. The ECB are cautiously optimistic and last week’s retail sales data showed some strength. The only other data released has been Sentix Investor Confidence out last night. It came in below expectations and a touch lower than last month, but it’s not a huge market moving number. Some positive news from Greece with the 2014 budget forecast seeing a return to growth. That will be a welcome relief, as will the current talk of resurrecting the bailout loans to a 50 year maturity. Still to come this week we have German factory orders, industrial production from both France and Germany, the ECB monthly bulletin. Draghi is also scheduled to make a couple of speeches on Wednesday and Thursday which will be closely watched.

United Kingdom

There have been no economic data releases to materially change the current outlook for the United Kingdom. Last week’s readings from the manufacturing, construction, and service sectors pretty much all told the same story. Although they came in a touch under expectations they were all still strong numbers and confirm the economy is well and truly on the recovery path. This week we have the Bank of England (BOE) monetary policy decision which should hold no surprises. The central bank will be happy to sit tight and reaffirm their commitment to keeping rates low for as long as possible. Ahead of that we get manufacturing and industrial production numbers, the trade balance, and the BOE credit conditions survey.

Japan

We have heard a fair bit from the Bank of Japan (BOJ) over the last few days. On Friday we had their Monetary Policy Statement, and then yesterday we got their Monthly report. There has been no significant change in the current stance, but we had some insight into their thinking. The BOJ believes PM Abe made the correct decision on raising the sales tax as it is important in gaining market confidence in Japan’s debt management. The accompanying stimulus package makes and further action by the BOJ a lot less likely. The BOJ is concerned that a protracted political stalemate in Washington could have a serious impact on the US and world economies. The BOJ would respond in the event that it starts to hurt the Japanese economy. Later this week we get the minutes from the BOJ meeting, core machinery orders, and consumer confidence data.

Canada

Late last week we saw the release of the Purchasing Managers Index from Canada. It is a survey that covers both the manufacturing and service sectors. The result came in a touch under expectation, but still showed improvement over the previous month. We have seen some negative forecasts for Canadian auto production with warnings that it could fall as much as 25% by 2020, thanks in large part to strength in the Canadian dollar. This was offset however by an announcement from Petronas that they plan to build an LNG plant and pipeline in Canada to the tune of $36 bln. Building permits data out last night showed a big fall printing at -21.2%. This is a volatile series however and the previous month was an increase of 20.7%. The positive takeaway was that within the data residential permits fell by only 5.4%. The housing market does provide some risk for the Canadian economy so data like this will be a little concerning. Key data for the rest of the week comes in the form of the trade balance and employment figures.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »