Talking Points:

Dollar Deceptively Quiet as US Government Passes Shutdown Deadline
Japanese Yen, Nikkei 225 See Volatility Increase as Abe Confirms Tax Hike
Australian Dollar Could Advances on RBA’s Avoidance of More Further Rate Cuts

Dollar Deceptively Quiet as US Government Passes Shutdown Deadline
Debate in Congress to reach a budget deal continued through the midnight deadline in Washington. Unable to reach a palatable agreement for both the House and Senate, the US government is partially shutting down federal agencies for the first time since 1997. Volatility surrounding this event risk was substantial in the early Asia session, but we have yet to see a meaningful trend develop either behind risk trends or the US Dollar. The implications this event carries for both the currency and capital markets are less severe than some have prepared for. The longer the shutdown lasts, the greater the impact will be on economic output – not a pleasant consideration given the uneven outlook for growth without this trouble. However, this event doesn’t immediately threaten financial market stability nor risk a return to recession.

The initial reaction to this splashy financial market headline, though, is not the end to its influence. The more destructive influence that this even can have on markets is its impression on investor confidence. There are plenty of catalysts that can sabotage sentiment that is precariously built on record leverage and a dangerous yield chase to beat the returns of a stimulus-backed equity index. Disharmony in Washington is yet another reason for global investors to be fearful. This event will certainly paint expectations for the more important date in the US government’s calendar: October 17. That is the day that Treasury Secretary Jack Lew expects the US will run out of money without a debt ceiling increase. The disorderly nature of that event would be far more disruptive – and perhas dollar bullish as it encourages a ‘flight to safety’.

Euro Gaps Down on the Open but Italy Fears Prove Limited
More worrisome than the situation in the United States, the Eurozone is facing a threat with far more layers and fewer positive scenarios. Over the weekend, Italy’s People of Freedom (PDL) party – headed by former Prime Minister Silvio Berlusconi – announced its resignation from the coalition government. This means that the standing Prime Minister Enrico Letta will have to create a new coalition without the full backing his party’s main rival or the country heads to new elections. This is particularly troubling for Italy as the country is struggling to recover from recession and has the largest debt load in Europe. In this state of flux, necessary reform will be nigh impossible to push forward. Letta is expected to call a vote of confidence Wednesday and the Senate’s next meet on remove Berlusconi from Parliament is Friday.

Japanese Yen, Nikkei 225 See Volatility Increase as Abe Confirms Tax Hike
There was a notable pick up in intraday volatility for Japanese yen pairs and the Nikkei 225 this morning as the market digested notable risk-troubling headlines (Italy’s leadership troubles and the US government shutdown), but there is something more innate for FX traders to keep an eye on. Japan Prime Minister Shinzo Abe is scheduled to give a statement early evening Tuesday in Tokyo on his plans for the scheduled tax hike and offsetting stimulus program. He already preempted the meeting however by confirming the April levy increase to 8 percent.

Australian Dollar Could Advances on RBA’s Avoidance of More Further Rate Cuts
The typical assumption for monetary policy decisions is that when there is no change in the course, there is no change in the currency. Yet, we can see in the Australian dollar’s reaction to the RBA announcement this morning that that is too simple an assessment. After the central bank decision, we find the currency up sharply against all of its major counterparts. Aside from holding the benchmark rate at 2.50 percent, the group released a lukewarm statement that said the current bearing was roughly ‘appropriate’. That is viewed as a mildly bullish outcome for the Aussie dollar because up until last month’s gathering, the country was seen to be on a decidedly dovish policy bearing. The rate cuts curbed the currency’s strength through ‘risk positive’ periods and led to a near 16.5 percent drop in AUDUSD from April. There is room to recovery.

Pound Rallies to 2013 High versus Greenback
The pound is was one of the best performing currencies through the opening 24 hours of trade this week – and yet it didn’t carry the level of event risk seen for so many of its major counterparts. That lack of open risk may have proved a boon for the sterling as FX traders and global investors attempt to avoid the negative scenarios so many other regions face. For event risk, the docket carried housing and lending data. House prices rose at the fast pace in 6 years while net consumer credit rose £577 million pounds. Alternatively, the round of data would also show non-financial business lending fell an annualized 3.6 percent while foreign investors sold a net £6 billion pounds in UK government bonds (gilts). None of this curbs the sterling’s improving yield outlook – and that is a serious currency benefit.

Canadian Dollar Ends Day Lower Against Most Majors Despite Robust GDP Numbers
With the exception of CADJPY, the Canadian dollar dropped against all of its major counterparts Monday. While the moves were particularly small (the biggest slide was only 0.35 percent versus the New Zealand dollar), the consistency in this lean is surprising. From the docket, the loonie was looking at a notable headline to work with: the July GDP data. The headline report printed a 0.6 percent jump on the month – matching the fastest pace of expansion since September 2009 – and 1.4 percent expansion from the same period a year earlier. The positive impact this data could have had was diminished the knowledge that the strong increase followed the biggest drop since March 2009 (-0.6 percent) which was influenced by floods in Alberta and construction strike in Quebec. In the scale of broader risk trends, yield forecasts and typical mispriced event risk; this data ranks low for market impact.

Gold Refuses Clear Trend as US Government Shuts Down
There will be considerable debate over what impact the US government shutdown will have over the US economy, risk trends and dollar; but gold’s hesitance is genuinely surprising. Though the impact of this failed government spending bill doesn’t carry the same connotation as the expected October 17 deficit ceiling deadline, such uncertainty nevertheless typically gives gold’s ‘alternative store of wealth’ a boost anyway. Despite the implications though, gold was 0.6 percent lower through Monday’s close and is virtually unchanged through early Tuesday trade. Such a sedate response to important event risk – including the expected impact of Italy on the euro and the Japanese tax hike on the yen – speaks volumes to gold’s shift from its alternative-to-currency’s role. The metal’s severe bouts of volatility this past year have materially altered its traditional role as a low-boundary safe haven.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:00

CNY

Purchasing Manager Index Manufacturing (SEP)

51.6

Following disappointing HSBC data, all eyes will be on the Chinese print.

1:30

JPY

Labor Cash Earnings (YoY) (AUG)

-0.3%

0.4%

The prior print was revised from 0.4% to -0.1%.

1:30

AUD

Retail Sales s.a. (MoM) (AUG)

0.3%

0.1%

With the Australian Dollar seeing strength in recent weeks, there are risks that the RBA may try to talk down the Aussi.