Daily Market Report 02/10/2013

Following the announcement of a partial US government shutdown, the US dollar came into focus yesterday. Although the currency weakened off following the announcement, further losses on the US dollar were limited and against some counterparts, the dollar actually finished marginally higher. There are several explanations for this. 

Firstly, the US dollar had already started its decline when speculation was mounting that a shutdown was possible, meaning that perhaps the event had already been priced into markets.

Secondly, several analysts are in the belief that the impasse could well be short lived, with some touting that the work stoppage could end in time for US lawmakers to tackle the debt ceiling on October 17th. 

And thirdly, data released in the afternoon gave investors a bit of encouragement with regards to the Fed beginning to taper monetary stimulus sooner. ISM manufacturing expanded further in September rising to 56.2.

Indeed the US dollar could well be supported today if the ADP employment change, usually a precursor for Friday’s non-farm payrolls, show that an additional 180,000 jobs were added in September.

Closer to home, although Markit manufacturing PMI grew slightly slower in September, the data shows that growth still remains close to Augusts two and half year high. The pound could see further support today and tomorrow as both the construction and service sectors are both set to have expanded further in September.

Markit manufacturing PMI for the euro zone also marginally missed expectations but nonetheless remained near the 26 month high of August. The euro drew support after Eurostat revealed that the unemployment rate for the euro zone unexpectedly fell to 12% in August.

Despite the encouraging data, the euro look set to remain under pressure over the political crisis in Italy as well as speculation that the ECB may pump more liquidity into the markets by utilising the Long Term Refinancing Operation. Mario Draghi has hinted in his last two speeches that the LTRO could be an option should the economy need it. All eyes will be on Mario Draghi’s press conference this afternoon for hints on any further stimulus.

Italian Prime Minister, Enrico Letta, will be in focus also this morning as he heads into parliament for a make or break confidence vote. The big question will be how many of Berlusconi’s party, People of Freedom Party, throw their support behind Metta today, especially after Berlusconi ordered his ministers out of the collation.

The US dollar will of course remain in focus amongst investors and whilst it could be early days, the old saying “Sell on the rumour, buy on the news” could well be in effect, given that the market has already priced in the government shutdown. Also the GBPUSD rate has bounced off the top of a longer term down trending range that has been in place since 2009, suggesting that this could be as high GBPUSD is likely to go in its current run up.

Key Announcements:

9.30am – GBP – PMI Construction (Sep): Expected to expand further to 59.2.

12.00pm – USD – MBA Mortgage Applications (Sept 27): Previously at 5.5%.

12.45pm – EUR – ECB Interest Rate Decision: Expected to remain at 0.5%.

13.15pm – USD – ADP Employment Change (Sep): Expected to increase to 180,000.

13.30pm – EUR – ECB Monetary Policy Statement.

20.30pm – USD – Fed’s Bernanke Speech