Tapering expectations driving the USD

The FX space went through a volatile session as the investment community continued to react to political headlines.

- Political leaders closer to a solution

- Sharp rise in unemployment claims

- China data due out over the weekend

Risk found support on headlines that House Republicans have agreed to a short-term extension to the debt ceiling until late November. However, there was some confusion post US trade after fresh headlines came out suggesting President Obama rejected the extension and wants an agreement which also sees the government being reopened. This was then rejected by an official Whitehouse comment saying the President is yet to respond at all. Normality was restored in the FX space and we are currently seeing some steady trade as we await a decision from the President. Also affecting the greenback at the moment are QE tapering expectations on the back of the recent minutes and Janet Yellen’s nomination for the Fed chair position.

Sharp rise in unemployment claims

Another interesting situation unfolding is the fact that tapering might continue to experience delays the longer this shutdown rolls on, with a lack of data contributing to a cautious approach by the Fed. There was a sharp miss in unemployment claims (374k versus 307k expected) which lifted the 4-week moving average by 20k. This week’s FOMC minutes look very stale and we feel the better indication at the moment is from Fed members. Fed member Bullard was on the wires saying October tapering is looking less likely due to the shutdown, and Williams said tapering will be gradual as opposed to a ‘slamming on the brakes’.

There was also a recovery in the greenback, with the most significant move being in USD/JPY which made its way through 98 and is now hanging at around 98.35. I actually feel this pair is set to extend these gains in the short term as the safe haven trade unwinds with US leaders looking like they are closer to securing a solution.

China data due out over the weekend

EUR/USD also managed a recovery with comments by ECB President Mario Draghi helping to underpin the single currency. Draghi was on the wires saying the Governing Council has unanimously agreed to incorporate an easing bias that explicitly provides for further rate reductions should market conditions deteriorate. Despite experiencing some volatility, EUR/USD remains sidelined at around 1.353.

On the European economic front, today we have Germany’s revised CPI due out. AUD/USD dropped below 0.94 in Asia yesterday but experienced a sharp recovery back to 0.946, with the 0.93-0.95 range continuing to hold. There isn’t anything significant on the local economic calendar today but there might be some positioning in the pair as we head towards some China releases. Over the weekend China releases its trade balance numbers along with new loans and M2 money supply data.

On the US front we have Fed member Powell on the wires and we will continue to see tapering repricing being the dominant theme. We also have consumer sentiment and inflation expectations due out. As a result, the USD is likely to continue setting the tone for the FX space, particularly with the ongoing political drama.

USD/JPY nudges through ¥98USD/JPY nudges through ¥98

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