US shutdown risk avoided for now providing some relief for USD

USD: US government shutdown risk pushed into early next year  

The US dollar is staging a modest rebound following the heavy sell-off on Tuesday in response to the release of the US CPI report for October that provided further evidence of slowing inflation pressures. The dollar index has found support at 104.00-level which comes in just above the 200-day moving average at around 103.60-level.  Fundamentally the US dollar was supported yesterday as well by the release of the stronger than expected US retail sales report for October, and by the successful passage of votes in Congress to avert a government shutdown. The main upside surprise in the retail sales report were the upward revisions to the prior month when control sales were revised higher to show an increase of 0.7%M/M in September. For Q3 as a whole control retail sales growth increased by an annualized rate of 6.9%. The latest GDP report for Q3 revealed that personal consumption increased by annualized rate of 4.0%. However, we remain sceptical that the summer surge in spending is sustainable. The slowdown in control retail sales to growth of 0.2%M/M in October indicates that personal consumption has already moderated at the start of Q4 although there is no reason to expect a sudden collapse either. A loss of growth momentum in Q4 should give the Fed another reason to leave rates on hold, after they warned that persistently above trend growth could yet trigger further hikes. Overall, the latest macro data flow including weaker nonfarm payrolls and US CPI reports have given market participants increased confidence that the Fed’s hiking cycle has ended and will be followed by rate cuts next year as inflation moves closer to target. The US rate market is now fully pricing in the first 25bps cut from the Fed by the June FOMC meeting, and around 92bps of cuts by the end of next year. The recent dovish repricing of the Fed policy outlook has been the main catalyst for the liquidation of US dollar positions that had been built up last month.

Secondly, the US dollar derived some temporary support yesterday after Congress passed another temporary funding bill to avert a government shutdown before the deadline on Friday. The temporary measure funds some parts of the government through to 19^th January and others through to 2^nd February. The new House speaker Mike Johnson has stated that this is the last time he would support short-term funding measure which ups the ante for the next phase of talks early next year. As Bloomberg is reporting, the risk of partial government shutdown in January is heightened because the agencies singled out in the first funding lapse wouldn’t trigger some of the most politically sensitive consequences such as cutting off pay for military personnel and closing national parks. The temporary financing measures are another can kicking exercise which hasn’t really addressed the fundamental issues that are currently dividing the Republicans of which 93 voted against the temporary bill in the House. The risk of a government shutdown and significant forced spending cuts will intensify in the first half of next year.               

 

SPECULATORS HAD BEEN BUILDING UP USD LONGS

Source: Macrobond & MUFG GMR

AUD: Strong employment report leaves door open for one final RBA hike

The main economic data release overnight was the latest employment report from Australia. It was a strong report revealing that employment increased by 55k in October. It was noted though that the recent referendum contributed to some temporary growth in employment, hours worked and participation but the Australian Bureau of Statistics agency were unable to quantify the impact. The trend for employment growth remains strong enough (it has averaged 36.5k/month so far this year vs. an average of 43k/month in 2022) to keep the unemployment rate broadly stable. The unemployment rate increased by 0.2 point to 3.7% in October, and has been fluctuating in a narrow range between 3.4% and 3.7% since the middle of last year. Overall, the report will keep alive expectations that the RBA could deliver one final hike later this year.

The developments have though had little to no impact on the performance of the Australian dollar overnight which has underperformed alongside the New Zealand dollar. It appears to be more of a correction for the Australian dollar after strong gains in recent days. The AUD/USD rate jumped from an intra-day low of 0.6360 on Tuesday prior to the US CPI release to a high yesterday of 0.6542. The next important resistance level remains the 200-day moving average that comes in 0.6596. The Australian dollar has strengthened even more notably against the yen this week resulting in the AUD/JPY rate breaking above the 98.00-level for the first time since September 2022. The next important resistance levels are provided by the 100.00-level which was last broken back in late 2014 and before that in Q2 2013. Please see our latest FX Focus: USD/JPY macro update (click here) for more details.

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
US	11:00	Fed Governor Cook Speaks	--	--	--	!
EC	11:30	ECB President Lagarde Speaks	--	--	--	!!
CA	12:15	Housing Starts	Oct	252.9K	270.5K	!!
US	13:30	Import Price Index (YoY)	--	--	-1.7%	!
US	13:30	Initial Jobless Claims	--	220K	217K	!!!
US	14:15	Industrial Production (MoM)	Oct	-0.3%	0.3%	!!
US	14:25	FOMC Member Williams Speaks	--	--	--	!!
US	15:00	Fed Governor Kroszner Speaks	--	--	--	!!
US	15:00	NAHB Housing Market Index	Nov	40	40	!
US	15:30	Fed Waller Speaks	--	--	--	!!
UK	15:45	MPC Member Ramsden Speaks	--	--	--	!!

Source: Bloomberg