US DEBT CEILING: We have a deal!

The US Congress has passed a bill which will keep the government funded until January 15 and suspend the debt ceiling through February 7. The bill easily made it through the Senate and then passed its second test in the House of Representatives, before being given to President Obama for its final tick of approval. The White House Budget office has announced that the US government will reopen tomorrow.

In the end it was a bit of an anti-climax, with a fairly limited reaction in the market. The US dollar is slightly higher against the Kiwi and the Aussie but it is relatively unchanged against the rest of the majors, expect for USDJPY which is giving up its earlier gains. Asia’s equity markets are also not reacting heavily to the news that the bill made it through the House of Representatives. This is not surprising given that overwhelming feeling in the market was that the bill was going to get the tick of approval from Congress, especially after House Speaker Boehner expressed his support, and markets had already had time to react.

So what now?

US politicians have created some breathing room, but only enough to keep the can rolling until February. In three months’ time we may go through this all over again. Yet, there is a chance Republicans and Democrats may be a bit better behaved then when elections are only just around the corner.

Nevertheless, some damage may have already been done. The bulletproof coating of the ultimate safe haven asset, US debt, has been punctured, albeit only by a pinprick. If US politicians continue to bicker to the point where they almost cause the world’s largest economy to default on its debt, then the market may start to lose faith in the previously unchallenged assumption that investing in US government debt is zero beta play. The end result may be that China and other holders of US debt may start to question the safe haven status of treasuries

Was the rally in USDJPY overcooked?

USDJPY has started to retrace its earlier gains after failing to break a resistance zone around 99.00. This could mean that the initial run higher in USDJPY on the back of the news that the Senate made a deal may have been overdone. However, it remains above a key near-term support zone around 98.00 and is finding some support around its 50hr SMA. The big test for the pair will be whether it can hold above its 200day SMA in the long-term, which is currently around 97.15 – the pair hasn’t been below its 200day SMA since it started its massive push higher in early November.

Source: Forex.com

16.10.2013