US Morning Update - Easy Forex News

Major Overnight Headlines

• UK unemployment rate unchanged at 7.7% in August; September claims fall more than expected

• Euro Area trade surplus rises 1.3bln in August to 12.3bln; nominal imports and exports both expand

• New Zealand Q3 CPI rises 0.9% versus a rise of 0.8% expected

In terms of key currencies we still like owning a bit of CHF in this environment, even though 1-month CHF implied vols are now trading at a premium to realised ones, which is a reversal from where things were at the end of September. We suspect based on activity in the 1-month risk reversals that this increased interest in the CHF has been biased towards CHF upside. Participants are clearly expressing a greater interest in optionality for event risk, but the relatively suppressed vols probably tell us there is still a lot of uncertainty over whether or not that event risk will actually materialise. This is a classic ‘too big to fail’ dilemma: a US default is just too big of a dilemma for policy makers to not avoid – but it’s still a dilemma which may not be avoided, and people should not proceed ‘un-hedged’.

Fitch’s shift to a ‘negative’ stance on the US sovereign rating outlook has been important for market psychology today, and explains some of the price action across markets. The outlook will probably be sustained regardless of whether or not there is a deal in Washington to lift the debt ceiling this week. In short then, the Fitch shift forces market participants to look beyond the horizon of 1-3 months and towards a period of more prolonged difficulty for the US on the fiscal side.

Finally, we also think it’s worth injecting a bit of macro economic colour into the picture. The Euro Area trade data still suggest that demand suppression has continued to ease. All things being equal, this implies a shallower upward slope in the trade surplus over time, which should help cap EUR gains. However, the weak USD leg of the strong EUR equation will still overpower any macro economic arguments pointing in the other direction – we continue for now to look to 1.3500 as a good area to buy EUR in, but only because yesterday the talks in Washington seemed to go in the right direction. If things change for the worse we would just stay away.

Read the full report: FX Daily

BMO