A potential deal that will re-open the US federal government and avoid a default has helped the greenback extend yesterday's gains. Initial report suggest the compromise with authorize spending through mid-January and raise the debt limit through mid-February. This will buy time while negotiations take place.
Despite the partisan rhetoric, we continue to expect that the eventual agreement will entail more spending cuts as Obama and many Republicans are not far apart here. The gap is on tax increases, and will likely be the source of much consternation. At the same time, the chronic self-made crisis and last minute resolution undermines the US leadership and weakens its ability to project soft power.
The US dollar is bid against the European complex of currencies, but is softer against the dollar-bloc, led by the Aussie, which traded at four-week highs following the RBA minutes that reinforce ideas that another rate cut is possible, but is surely not imminent. At the same time, Rio Tinto strong Q3 results helped lift the tone for iron ore and copper. Support is now seen near $0.9500. On the upside, the next target for the bulls is near $0.9600 and then $0.9660.
Asian equities were higher, lifted by the recovery in US shares yesterday as word the a deal was close made the rounds in holiday-thinned activity. The Nikkei gapped higher, though disappointing industrial production news encouraged selling into the opening gains, though it managed to close about 0.25% higher to extend its advancing streak to five sessions. August industrial output fell 0.9% instead of 0.7% in the preliminary release. Recall, economists had initially expected industrial output to slip only 0.2% in August after the 3.5% jump in July.
The dollar extended its gains against the yen to JPY98.70, the highest since Oct 1. Last Tuesday, the dollar had flirted with its 200-day moving average (that came in near JPY96.73). With today's gains the dollar is recouped half of the ground lost since the Sept 9 high near JPY100.60, which was the last time the greenback was above JPY100. The next retracement objective is just above JPY99.00. We note that the US-Japan 10-year differential is gradually widening after reaching almost 190 bp, a two -month low at the beginning of Oct. It is now moving above 205 bp.
News from Europe has been limited to the German ZEW and UK CPI figures. While the expectations component of the ZEW improved to 52.8 from 49.6, the assessment of current situation unexpectedly slipped to 29.7 from 31.3. It was not sufficient to prevent more liquidation of euro longs. It quickly gave up the gains score at the end of last week. Last week's lows were set a little above $1.3485, but congestion in late September extended toward $1.3460 and it is really this latter area that needs to be taken out to boost confidence that a top is in place. The intra-day technicals warn that the market is a bit stretched and it may be difficult for the North American session to sustain the euro's downside momentum.
The UK's Sept CPI was on tad firmer than expected at 2.7% (the same as August but above the 2.6% consensus expectation). Sterling initially firmed in response but was beaten back after poking briefly through $1.60. Lat week's lows for sterling were set near $1.5915. Like the euro, sterling intra-day technicals are stretched as the North American session is about to begin and it may be difficult to sustain the momentum.
Separately, the UK and China have reached some agreements today that are truly remarkable. It is not simply a pilot program that grants the UK an GBP8 bln QFII quota. The UK, after all has become the most important offshore center yuan trading, after Hong Kong. It accounts for a little more than 60% of yuan trading outside of China and Hong Kong, according to SWIFT.
Rather what caught our eye was that some Chinese banks will be allowed to expand a wholesale presence in the UK through branches rather than subsidiaries. This may sound like hair-splitting but there are important ramifications. Branches tended not to be as closely regulated as subsidiaries. The Prudential Regulatory Authority (PRA)has wanted to tighten the regulatory framework. We note that the JP Morgan whale operated as a branch, as did Cyprus' Laiki bank, which did have deposit insurance.
First, with the PRA seemingly to capitulate to political pressure, it raises questions about its independence. Second, it illustrates how, despite the best intentions, how systemic risks can be rebuilt in the system, even before the last crisis has really been resolved.
China's three largest banks have their European headquarters in Luxembourg, reportedly in part because of the UK's regulatory stance. It is understandable that the UK would not want to miss the opportunity to participate in the growing yuan trade. Yet it is precisely that competitive desire that weakened the regulatory environment previously.
Despite the partisan rhetoric, we continue to expect that the eventual agreement will entail more spending cuts as Obama and many Republicans are not far apart here. The gap is on tax increases, and will likely be the source of much consternation. At the same time, the chronic self-made crisis and last minute resolution undermines the US leadership and weakens its ability to project soft power.
The US dollar is bid against the European complex of currencies, but is softer against the dollar-bloc, led by the Aussie, which traded at four-week highs following the RBA minutes that reinforce ideas that another rate cut is possible, but is surely not imminent. At the same time, Rio Tinto strong Q3 results helped lift the tone for iron ore and copper. Support is now seen near $0.9500. On the upside, the next target for the bulls is near $0.9600 and then $0.9660.
Asian equities were higher, lifted by the recovery in US shares yesterday as word the a deal was close made the rounds in holiday-thinned activity. The Nikkei gapped higher, though disappointing industrial production news encouraged selling into the opening gains, though it managed to close about 0.25% higher to extend its advancing streak to five sessions. August industrial output fell 0.9% instead of 0.7% in the preliminary release. Recall, economists had initially expected industrial output to slip only 0.2% in August after the 3.5% jump in July.
The dollar extended its gains against the yen to JPY98.70, the highest since Oct 1. Last Tuesday, the dollar had flirted with its 200-day moving average (that came in near JPY96.73). With today's gains the dollar is recouped half of the ground lost since the Sept 9 high near JPY100.60, which was the last time the greenback was above JPY100. The next retracement objective is just above JPY99.00. We note that the US-Japan 10-year differential is gradually widening after reaching almost 190 bp, a two -month low at the beginning of Oct. It is now moving above 205 bp.
News from Europe has been limited to the German ZEW and UK CPI figures. While the expectations component of the ZEW improved to 52.8 from 49.6, the assessment of current situation unexpectedly slipped to 29.7 from 31.3. It was not sufficient to prevent more liquidation of euro longs. It quickly gave up the gains score at the end of last week. Last week's lows were set a little above $1.3485, but congestion in late September extended toward $1.3460 and it is really this latter area that needs to be taken out to boost confidence that a top is in place. The intra-day technicals warn that the market is a bit stretched and it may be difficult for the North American session to sustain the euro's downside momentum.
The UK's Sept CPI was on tad firmer than expected at 2.7% (the same as August but above the 2.6% consensus expectation). Sterling initially firmed in response but was beaten back after poking briefly through $1.60. Lat week's lows for sterling were set near $1.5915. Like the euro, sterling intra-day technicals are stretched as the North American session is about to begin and it may be difficult to sustain the momentum.
Separately, the UK and China have reached some agreements today that are truly remarkable. It is not simply a pilot program that grants the UK an GBP8 bln QFII quota. The UK, after all has become the most important offshore center yuan trading, after Hong Kong. It accounts for a little more than 60% of yuan trading outside of China and Hong Kong, according to SWIFT.
Rather what caught our eye was that some Chinese banks will be allowed to expand a wholesale presence in the UK through branches rather than subsidiaries. This may sound like hair-splitting but there are important ramifications. Branches tended not to be as closely regulated as subsidiaries. The Prudential Regulatory Authority (PRA)has wanted to tighten the regulatory framework. We note that the JP Morgan whale operated as a branch, as did Cyprus' Laiki bank, which did have deposit insurance.
First, with the PRA seemingly to capitulate to political pressure, it raises questions about its independence. Second, it illustrates how, despite the best intentions, how systemic risks can be rebuilt in the system, even before the last crisis has really been resolved.
China's three largest banks have their European headquarters in Luxembourg, reportedly in part because of the UK's regulatory stance. It is understandable that the UK would not want to miss the opportunity to participate in the growing yuan trade. Yet it is precisely that competitive desire that weakened the regulatory environment previously.
Dollar Bid on Potential Deal, UK Pursues China
Reviewed by Marc Chandler
on
October 15, 2013
Rating:
Reviewed by Marc Chandler
on
October 15, 2013
Rating:
