Time of writing: 03:30 GMT

The Big Picture

Risk measures for the US have declined and the dollar is stronger against most currencies at the European opening Monday. US investors were apparently encouraged on Friday that the House voted to give back pay to US government workers who are furloughed by the government shut-down; that will greatly reduce the economic impact from lower incomes. Investors also took heart from private comments by House Majority Leader Boehner that he wouldn’t allow a debt default, although as US Treasury Secretary Lew pointed out over the weekend, Boehner didn’t want to shut down the government, either. Reports that the Democrats have been examining the House of Representatives rulebook to see if they can present a bill to fund the government without the cooperation of the majority party leadership sparked some optimism as well. As a result, US stocks closed 0.5% higher Friday, the VIX index fell from its three-month high, the yield on the T-bill maturing on Oct. 31st declined a bit and the US 1-year CDS rate fell to 45 from the high of 64 on Thursday. That caused some short-covering in USD against most G10 currencies.

While the decision to give back pay to government workers will reduce the economic impact of the shut-down, I’m not sure it’s a positive development. On the contrary, it seems to me to be part of the Republican strategy to fund enough of the government to take the pressure off them while they wait for the debt ceiling deadline. It should therefore be seen as a negative, in my view. On the Democrat side, while they may be looking for a way to go around the Republican leadership to end the government shut-down, the odds of success are slim and in any event don’t include the debt ceiling. I fear that today’s USD strength may not last that long. But with many assets near key levels – US 10yr bond close to 2.60%, USD/JPY at 97.00 and USD/CHF at 0.9000 – the market may have reached some equilibrium for now. It’s a positive that politicians have moved to ameliorate the economic impact of the shutdown and without any further negative news, we could be in for some range trading and even profit-taking on short USD positions until the next lurch downward.

Nonetheless, the outlook remains negative. The weekend press gave no reason for optimism. On the contrary, there were reports that the conservative Republicans who are driving the car off the cliff have been encouraged by the positive response from their constituents. Boehner Sunday insisted that the House would not vote to finance and reopen the government or raise debt ceiling without concessions from President Obama on the health care law, which of course the Democrats would not even consider. With the S&P 500 futures opening in Europe down 0.6%, I wonder just how long the dollar will remain stable.

The only economic indicator out in European time is the Eurozone Sentix investor confidence index for October, which is expected to rise to 8.5 from 6.5. In the US, consumer credit for August apparently will be released; the forecast is for a rise to USD 12.0bn from USD 10.4bn, but will anyone be watching the US indicators?

The Market

EUR/USD

• EUR/USD moved lower as the partial US government shutdown enters its seventh day. During Monday’s early European morning the pair is trading slightly above the 1.3564 (S1) barrier. If the bulls manage to maintain the rate above the aforementioned level, I expect them to challenge once more the short-term ceiling at 1.3644 (R1). However, negative divergence is observed between both oscillators and the price action, indicating decreasing momentum.

• Support is identified at 1.3564 (S1), 1.3461 (S2) and 1.3400 (S3) respectively.

• Resistance levels are the level of 1.3644 (R1), followed by 1.3706 (R2) and 1.3800 (R3). The latter two are found from the daily chart.

EUR/JPY

• EUR/JPY moved lower reaching the 131.62 (S1) floor as safe-haven demand spurred yen buying. In my opinion the trend has reversed to a downtrend since the rate is trading below the blue uptrend line, forming lower lows and lower highs as indicated by the short-term purple channel. A decisive close below the 131.62 (S1) support will have larger bearish implication and would trigger extensions towards the 130.96 (S2) level next. The rate is trading below both the moving averages, while the MACD oscillator lies below its trigger line in its negative territory, confirming the bearish attitude of the price action.

• Support levels are at 131.62 (S1), followed by 130.96 (S2) and 129.89 (S3).

• Resistance is identified at 133.20 (R1), followed by 134.00 (R2) and 134.67(R3).

GBP/USD

• GBP/USD moved significantly lower on Friday after breaking below the 1.6160 level (today’s resistance). The rate’s downward bias was stopped by the psychological support of 1.6000 (S1) and during the early morning, European trading, the price is found lying slightly above it. As long as the 1.6000 (S1) barrier holds, I consider the uptrend to remain in force, since the pair is trading above the blue uptrend line and the 20-period moving average lies above the 200-period moving average.

• Support levels are at the psychological level of 1.6000 (S1), followed by 1.5890 (S2) and 1.5717 (S3).

• Resistance levels are at 1.6160 (R1), followed by 1.6260 (R2) and 1.6377 (R3). The latter one is found from the daily chart.

Gold

• Gold moved sideways, remaining below the barrier of 1316 (R1). A clear break above this resistance level followed by a violation of the trend line would be a reason for some concern. Also, positive divergence is observed between our oscillators and the price action, indicating that the downtrend is losing momentum. However, the overall short-term trend remains to the downside, as indicated by the the blue downtrend line and by the bearish crossover of the moving averages.

• Support levels are at 1291 (S1), followed by 1273 (S2) and 1242 (S3). The latter one is found from the daily chart.

• Resistance is identified at the 1316 (R1) level, followed by 1343 (R2) and 1368 (R3).

Oil

• WTI once more hit the 104.19 (R1) barrier and moved lower. Currently, the price is trading between the key support level of 102.23 (S1) and the aforementioned resistance. If the selling pressure continues to drive the price lower, I expect the bears to challenge the 102.23 (S1) floor once more. WTI remains in its downward sloping channel and alongside with the bearish cross of the moving averages, they shift the odds for further downward movement.

• Support levels are at 102.23 (S1), 101.02 (S2) and 99.18 (S3). The latter one is identified on the daily chart.

• Resistance levels are at 104.19 (R1), followed by 106.06 (R2) and 108.13 (R3).

BENCHMARK CURRENCY RATES – DAILY GAINERS AND LOSERS

MARKETS SUMMARY