All Eyes on Last Chance to Break Through US Political Impasse - 16.10.2013

There has been no progress on Tuesday regarding US debt ceiling impasse, contrary to what investors were hoping. In addition, Fitch rating agency placed the United States triple A rating on watch negative. Earlier, Empire Manufacturing dropped to 1.5 for October, while was projected at 8.2 and was down compared to 6.3 figure in September, indicating New York manufacturers confidence has weakened after a more than a 2-week government shut down. However, hopes persist in financial markets that a deal would be concluded on the last day before 17 of October when US likely will not be able to borrow to meet its obligations.

US stocks closed in red color as traders were disappointed by failure to reach an agreement on lifting borrowing limit and funding government that is closed for a third week now. The S&P 500 declined by 0.71% to 1,698, Dow Jones lost 133.25 points to end at 15,168 and NASDAQ dropped by 0.56%. Asian stocks followed the negative path further weighed by Fitch placing US to negative watch. Shanghai Composite was down by 2.10% and Hang Seng declined by 0.77% while NIKKEI 225 was up by 0.18% contrary to overall bias.

The US dollar index trimmed during US session the most of its hardly gained ground on European session by falling from cap at 80.67 to 80.35. In general we saw the US dollar retreating against safer currencies like Japanese Yen and Swiss franc during the US session with the USDJPY returning to support at 98.08 and USDCHF falling back to 0.9120 after drawing a resistance line at 0.9170. We would expect a last minute deal to be sealed, otherwise we don’t want to think about the global financial implications. Last two weeks of shut down harmed US economy growth by more than 0.4% and thus FED is likely to keep unchanged asset purchases setting pressure on the greenback . Also, last minute lift of the debt limit may bring a US downgrade, therefore over the medium term we would expect a weaker US dollar.

Concerning European currencies, the Euro contra the greenback took advantage of the disappointment over the US lawmakers’ failure to agree and recovered as high as 1.3534 before extending into a consolidation momentum. Moreover, the Euro was also underpinned by stronger than expected German ZEW economic sentiment indicator. The GBPUSD remains steady in 1.6016/1.5913 tight sideways zone ahead of employment data today.