FX Daily Strategist: Europe

The seemingly intractable fiscal impasse in the US came to a rapid resolution on Wednesday, with the Senate reaching a bipartisanagreement. Overnight the House followed the Senate’s Wednesday afternoon vote and passed a resolution that allows the US government to fully reopen today and raises the debt ceiling until Feb 7. Data releases which were delayed by the shutdown will begin to roll in over subsequent days and weeks, including the September employment report which seems likely to be released some time next week. We think the conclusion of the fiscal impasse should allow market participants to begin rebuilding long USD positions, particularly vs. the JPY, GBP and EUR. Our favoured positions are short EURUSD and GBPUSD. Meanwhile, the rally in the commodity currencies has been muted overnight despite the improved backdrop for risk taking, likely due to the strong performance in these currencies over the week. Ahead today, the Philadelphia Fed is likely to echo the weakness in the Empire survey earlier this week, which was presumably driven in part by concerns about the government shutdown. With the shutdown now behind us, markets may be more inclined to look through any weakness in the Philadelphia report. Initial jobless claims will also be released. Claims rose sharply last week, reflecting recovery from a computer backlog which suppressed claims in prior weeks as well as government contractor layoffs due to the government shutdown. Markets will be cautious of interpreting the numbers given the idiosyncratic factors impacting the report.