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Is There Scope For More USD Weakness?

We recently received the news that the US government re-opened and last week we saw key US Economic data start to flow again. This kicked off with the September unemployment rate and non farm payrolls number; however these numbers managed to disappoint the markets.

The headline figures missed expectations with nonfarm payrolls up 148,000 (180,000 estimated) while the unemployment rate ticked lower to 7.2%.  The US economy added an average of 177,000 jobs in the first nine months of 2013, but the pace of hiring slowed to a 143,000 rate in the third quarter. A closer review of the report showed net revisions to the prior months taking the August figure to 193,000 from 169,000 while July was cut to 89,000 from 104,000.

More importantly for me it is going to be imperative to see the extent of the damage that the government shutdown has caused.  Many economists say it may take a few months for the data to be digested and we won’t have a clear read until the November payrolls report is released in early December.  This ultimately feels as if the Fed may delay tapering quantitative easing until March 2014, at the earliest, which you would have to imagine will further ignite the rally in equities, the move lower in Treasury yields and the weaker USD…..

Graph highlighting 10y Treasury Yield (yellow) & S&P 500 Index over the past 6 months

TYield_S&P500

Source: Bloomberg

There are some key questions to consider here. Firstly, what might reverse these trends? An ECB rate cut, a pull back in US equity markets or a period of upside surprises in US economic data releases would surely make markets assess the current levels of the EURUSD & GBPUSD exchange rates. However these all appear a long way off at the moment.

Secondly if the current trends are to continue where can we expect the major asset class to go over the short to medium term? This is where it starts to get interesting GBPUSD back in 2012 topped out at approximately 1.6300 no fewer than 3 times, before the 02-Jan-13 rally up to 1.6380. These have to be the near term targets.

Similarly in EURUSD the much talked about 1.3833 Fibonacci technical level (61.8% 2011 High / 2012 Low) will be the next target for the EUR bulls.

In US Treasury bonds the market has tested the 2.45% yield level but with no success yet, however a break of 2.45% opens up 2.25.

Whoever comes out on top may depend upon what the minutes to the October 30th FOMC meeting reflect in addition to the key data released on the 7th & 8th of November that includes payrolls, unemployment rate, Q3 GDP, personal spending, personal income, and PCE deflator data.

For me I think the effect of the government shut will be evident in the next batch of economic data releases and will at the end of the day disappoint markets expectations in levels of growth, payrolls and unemployment levels consequently leading to a break lower of the 2.45% 10 year yield and subsequent weakening of the USD above the 1.6500 level in GBPUSD & 1.4000 level in EURUSD. With Halloween and FOMC this week will the FED trick the markets again as they did with the no taper last month or treat the market to a continuation of QE?

EURUSD (white line -RHS) & GBPUSD (yellow line – LHS) Year to Date performance

GBPEURUSD

Source: Bloomberg

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