After a wildly positive 5 trading sessions, the United States Dollar is – finally – losing a bit of ground this morning.
Overview
Oil prices are providing a very much-needed boost to petrocurrencies today, and equities are trying their level best to move to positive territory after a week of losses. Focus has turned in the short-term to the potential US government shutdown, but the downside risks of such an event for USD are limited.
Though the prospect of a US government shutdown does loom large over quarter-end flows, realistically any sort of shutdown – unless it goes on for a very extended period of time – is unlikely to have any large impact on FX markets. Historically, government shutdowns in the US have had very limited impacts on USD, and especially given the Dollar’s rather unprecedented strength over the past 3 months, we do not foresee a large swing against the Buck. It looks like a short-term spending deal to keep the federal government running may be in the works as well.
In the event of a potential shutdown, data flows out of the US for the last quarter have all pointed in the same direction. The US economy appears to be stronger than its international peers, and though there are some cracks, any data gaps would not be likely to show a material downside in the macro picture. Realistically, there is little outside of a shock recession that could change the fortunes of USD through the end of the year. Even a threatened credit downgrade from Moody’s doesn’t really dent USD; as we saw when Fitch downgraded its US credit rating in August it didn’t stop the Dollar’s run.
We could start to see some potential risk to USD’s recent gains if a shutdown were to continue through November 1, when the Federal Reserve meets next. A prolonged shutdown could tip the Fed more toward holding interest rates steady, rather than hiking one final time as many Fed governors have indicated a preference toward over the last week. Even still, the focus for the Buck remains on real yields for the Dollar, and markets expect those to remain higher as the Fed is unlikely to implement any policy loosening any time soon, contrasting with its peers in Europe.
What to Watch Today…
- No major economic events are scheduled for today
- Monex USA Online is always open
AUD ⇑
Australian Dollar is the best performer in the G10 this morning, gaining north of 0.6% against USD. Month and quarter-end flows are dominating trading, pushing spot trading to a 5-day high. Personal consumption out of the US came in substantially below expectations this morning, driving Dollar weakness. As we have discussed over the past few days, central bank action remains the key driver of currency pricing, and markets expect the RBA to follow a similar path to the Fed.
EUR ⇑
As markets digest the European Central Bank’s likely final interest rate hike last week, the single currency is gaining this morning after a week straight of losses against USD. Though expectations have shifted substantially from January on the fortunes of the US economy, the prospects for the Eurozone remain quite grim, and the two largest economies in the region are staring down technical recessions in the next few months, prompting an overall shift lower for EUR.
