Dollar Outlook is a Bit Better

Marc To Market's picture

The shutdown of the US government and the uncertainty that it entails, and doubly so ahead of the looming debt ceiling, is a disruptive force, skewing the investment climate.  Many medium and long-term investors have largely moved to the sidelines.


The US dollar has been generally weaker since the shutdown.    The Australian dollar was the strongest currency against the US dollar over the past week.  It rose by about 1.2%, yet it is often understood as the opposite of a safe haven, a risk asset.  The yen has been the second strongest currency, appreciating by almost 0.85% against the dollar and is it usually perceived as a safe haven currency.  


Sterling and the Swiss franc  were the only majors to decline against the dollar last week.    The former has had a stellar run and its 6.5% advance makes it the best major performer over the past three months.  Profit-taking, arguably encouraged by three softer PMIs surveys, seemed to be the main culprit.    Unwinding of the risk-off positions ahead of the week was behind the franc's net loss on the week.  The euro had been putting in higher highs against the franc since the start of the week, but franc weakness at the end of the week was more the driver than euro strength. 


Although the closure of the Federal government and the approaching debt ceiling injects needless uncertainty and volatility (the VIX hit a 3-month high), investors seem to be looking beyond what is understood to be a short-run disruption.  Of the four days that the government was shut last week, the S&P 500 rose in two of the sessions, including Friday's.  


Surveys and the price action suggests few are really taking very seriously the risk that the US actually defaults, even if the risk of such has increased; not of course because it has been locked out of the capital markets, but due to its political dysfunction.   Pressure has been seen in the four week T-bills, which rose from about 2 bp at the end of last week to 13 bp ahead of the weekend.  In comparison the 3-month bill yield rose to almost 3 bp from 1.  


Previously we suggested the euro has potential toward $1.37.   The euro's high on October 3 was just shy of $1.3650.  While we do not want to read too much into the pullback ahead of the weekend, daily technical indicators such as the RSI and MACDs, are looking a bit stretched.  It appears to be warning of the risk of a deeper near-term pullback.  Initial support is seen near $1.3500.  It may take a break of the post-FOMC low near $1.3460 to boost confidence that a high is indeed in place.  


We peg initial support for sterling near $1.60, where the 20-day moving average is found.   The post-FOMC low was set near $.1.5955 and this needs to be convincingly violated to support ideas that a top is being carved out.   Bearish divergences are appearing in the daily RSI as the last week's high in spot was not confirmed by the technical indicator.  MACDs are crossing to the downside.  


The yen's technical outlook seem less clear.  The dollar was sold to five week lows against the yen and the RSI and MACDs are trending lower.  However, the 10-year interest rate differential has begun moving back in the US favor after falling about 30 bp in the aftermath of the FOMC.    The close of the North American session above the 5-day moving average (~97.60 now) would strengthen our more positive dollar bias.  


The technical outlook for the Canadian dollar is also not very clear.  The RSI has turned down for the greenback, while the MACDs are turning up.  The 5-day average has crossed above the 20-day average for the first time in nearly a month, but the US dollar appeared to run out of steam near CAD1.0355 at midweek and finished the week near the lows.    Initial support is seen near CAD1.0250-70.   The CAD1.0350-60 area looks like a reasonable cap.  


We had anticipated a weaker Australian dollar, but the Reserve Bank surprised with its neutral statement.  Several Australian banks have pushed out their rate cut forecasts into 2014.  Technically, the Aussie looks poised to retest the post-FOMC high near $0.9530, which corresponded to the 38.2% retracement of the sharp decline that began in mid-April.    The double bottom traced out in August suggests potential to push through $0.9600, while the next retracement objective is just above $0.9700.  


The Mexican peso slipped marginally against the dollar since the US government shutdown.  It managed to recover from the sharp drop on Thursday, which seemed to be more a function of a knock-on effect from the US, which reported a softer than expected service sector ISM and dramatic losses in US equities.   At the week's high, the dollar had risen 6% off the post-FOMC low.  Disappointing US auto sales earlier in the week (weakest since April) also did the peso no favors.  Initial support for the dollar is seen near MXN13.00-05..  We prefer to be patient and sell into a dollar spike toward MXN13.35-MXN13.40   At the week's high, the dollar had risen 6% off the post-FOMC low. 


The Federal government shutdown means the Commitment of Traders report from the CFTC is not available. 

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Radical Marijuana's picture

This article reads like a sports announcer watching the race between various turds, when the toilet bowl is flushing.

orangegeek's picture

USD appears to have bottomed.  Euro has appeared to have topped.


Aussie buck and Peso have no bearing on the value of the USD.  There are only six other currencies that measure against the USD.

Overdrawn's picture

Obama has enough power under the various “war on terror” rulings to declare a national emergency and raise the debt ceiling by executive order. An executive branch that has the power to inter citizens indefinitely and to murder them without due process of law, can certainly set aside a ceiling on debt that jeopardizes the government.

The real crisis is that jobs offshoring by US corporations has permanently lowered US tax revenues by shifting what would have been consumer income, US GDP, and tax base to China, India, and other countries where wages and the cost of living are relatively low. On the spending side, twelve years of wars have inflated annual expenditures. The consequence is a wide deficit gap between revenues and expenditures. Under the present circumstances, the deficit is too large to be closed. 

Economists and policymakers simply gave away a good chunk of the US economy in order to enhance corporate profits. One result has been to create in the US the worst distribution of income of all developed countries and of many undeveloped ones.
In the scheme of things, the enhanced profits are a short-run thing, because by halting the growth in consumer income, jobs offshoring has destroyed the US consumer market. 

The real crisis cannot be addressed unless the jobs are brought back home and the wars are stopped. As powerful organized interests oppose any such measures, Congress will pass a new debt ceiling and the real crisis will continue.

SAT 800's picture

I couldn't agree more. Clinton signed legislation giving China Most Favored Nation trading status; which was and is indefensible. It was simply purchased from Congress by lobbyists for big Corps. Both he and Mrs. Clinton have what I call a criminal mentality; they have no moral compass and their idea of public office is just; "something you can sell". The MIC is the other half of the problem. Look up Kandahar Air Base in Afghanistan, if you want to have an ah-ha moment. The whole project is just a black hole to drop money in; some of which rubs off on the way down, of course.

SAT 800's picture

Ironically enough; Putin of Russia is our best defender; he stopped Odumbo from dumping a few more millions of dollars worth of high tech weapons on the long suffering civilians of Syria.

FieldingMellish's picture

"Although the closure of the Federal government and the approaching debt ceiling injects needless uncertainty and volatility (the VIX hit a 3-month high), investors seem to be looking beyond what is understood to be a short-run disruption.  Of the four days that the government was shut last week, the S&P 500 rose in two of the sessions, including Friday's.  "


I find this rather incredible. We have potentially market-breaking events on the horizon and the market thinks it can predict the outcome with high probability based on a handful of previous data points.

TrustWho's picture

100% prediction is Daddy Bernanke and the BERNANKE PUT. Such a classic video, one more time....

This is old, so the new mantra is....Buy the Bad News or More Risk means HIGHER.

THe Fed has perverted the market and all these brilliant assholes on The Fed can do is more of the same. For example, idiot Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said this past Friday.....

The central bank may want to press on with bond buying even after the economy reaches what it considers full employment, “as long as it remains an effective tool,” he said. “There is a limit out there where the asset purchase program is no longer effective. We’re not there yet.”

The Fed gets the opposite reaction from its intentions, because the people (the people here are really a small set of entreprenuerers) really need a Preacher who can restore faith. Faith in the Future Opportunities. When you have people watching Prepper Shows and actually preparing for doomsday, the economy will struggle if banks loaned money for business growth at negative interest rates (i.e. gave people money every month on their unpaid principle). Outside of borrowing money for financial instruments, investment in physical assets like machine shops is near zero. The Fed is STUPID, like most politicians because they have NO REAL WORLD EXPERIENCE.  

What causes this pessimism? $17 trillion debt supported by a structural entitlement based deficit and our brilliant politicians are adding another entitlement. A Fed printing money that the call a controlled expansion of their balance sheet by adding almost $3 trillion to the balance sheet. The whip cream is with all this stimulus the economy is the best dirty shirt in the world of dirty shirts. And the cherry on top is all the leaders can do is MORE OF THE SAME.......BRILLIANT LEADERSHIP!!!!!!!