Dollars ‘Reality’ Premium Kicking In

Reality TV coverage does not get any better. It’s tantalizing close, or so capital markets are being led to believe, a halt to the US fiscal standoff is within the Senates grasp. If so, they now must race the clock to sell the plan to lawmakers before U.S. borrowing authority runs out later this week – the supposed deadline. The emerging deal would stave off a potential default, end the two-week old US partial government shutdown and change the immediate deadlines in favor of three new ones over the next couple of months – alas, more “can-kicking.”

Hollywood could not write a grander finale. So far, US politicking has managed to bring global financial markets to a near standstill. The lack of urgency from investors has born little pressure on US lawmakers to hasten their decision process. President Obama and company have been tongue lashed from various G10 members and international agencies, reminding the US that inactions are pushing the global economy towards another recession. Until a decision is reached asset classes remain paralyzed by global inactivity, lack of liquidity and “cheap” position taking.

Currently, fundamental data has a limited release Stateside, luckily that is not the case out of Europe. A couple of economic reports so far this morning have had a limited, but profound affect on forex price activity, very much a rarity over the last couple of weeks. Sterling briefly pushed to new intraday highs outright (1.6011) and against the EUR (0.8473) after last month’s inflation print came in unchanged from August, +0.4%, and +2.7% on the year. The market had been pricing in a -0.1% drop in both. The pace could accelerate in the months ahead as utility prices rise and “a topped out pound makes its presence felt.” Governor Carney’s +2% level looks as theoretical as ever. UK policy makers have said that they will not consider raising the main interest rate until there is a significant fall in UK unemployment. They expect their target of +7% jobless rate to e reached sometime in 2016 – “lower rates for longer.”

Despite Spain delivering a solid Bill auction result – Spanish treasury (Tesoro) sold just above the indicated range at lower borrowing costs and higher bid-to-covers (€4.57B vs. €3.5-4.5B indicated range in 6 and 12-month Bills) – and Greece’s 13-week yield falling below +4% for first time in nearly two-years – has not been helpful for weak EUR bull positioning this morning. Germany’s October ZEW Survey delivered some mixed results, current situation came in below both expectations (29.7 vs. 31.3 expected) and a month ago reading. This has managed to push the 17-member single currency to fall to a fresh low for the week and highlights the currency’s most vulnerable side (LHS – 1.3499). Price action ahead of today’s North American open would suggest that there were some decent stops triggered on the break, which came just before the mixed-result German ZEW survey.

Technically, the USD is in fine form in Europe this morning, racking up some decent gains despite the supportive data out of the UK and mainland Europe. The dollar is up +0.5% on the day as the market moves Stateside. The EUR’s next support is 1.3480 while sterling’s is 1.5885. Against JPY, the ‘mighty’ dollar continues to have its struggles, with ¥98.70 proving a difficult level to penetrate. If the market can succeed with some conviction then ¥99.50-100 is again opened where optioned related offers are located.

US treasury yields are moving higher (10’s +4-5bps +2.72%), but not by much, as investor optimism grows over a deal to avert a US debt crisis – despite it only being a temporary one. In reality, a US environment where economic growth remains tenuous and political strife considered more of a formality, argues for more of an investor defensive stance. This should keep US bond yields relatively in check with short-term and high quality product more in demand.

After shaking off the long weekend’s cobwebs, any positive Washington developments should help keep the dollars near-term trajectory intact, even given the uncertain timing of next week’s data. However, the combination of Janet Yellen’s nomination last week (dovish), the extended delay in US data releases, and the slightly softer tone of recent Purchasing Managers Index data would suggest that investors would continue to look for a softer USD in the near term. Near term G7/dollar support levels remain big, but not impenetrable. Both liquidity and short-term positioning will be expected to play a greater role in deciding a fairer dollar price level.

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