Dollar Mildly Lower As Budget Standoff Continues

Dollar is mildly lower as the week starts on news that the talks between US president Obama and House speaker Boehner on the debt limit issue broken down over the weekend. Nonetheless, Senator Majority leader Reid said that the talk with Minority leader McConnell was substantive and he remained optimistic. The negotiations will carry on today. Although market participants continued to expect a compromise would be made before the debt ceiling deadline, October 17, a prolonged shutdown of the government would be negative to the economic recovery. Canadian finance minister Flaherty said he's "discouraged" by the lack of progress in the US budget talks. Japan finance minister Aso said the US standoff is a "big issue" for Japan but there is no other way than for the Americans to sort it out themselves.

In China, trade surplus fell -US$ 13.3B to US$ 15.2B in September with exports falling and imports rising. The surprising drop in exports was mainly found in Southeast Asia with shipment to Indonesia and Thailand the worst affected. Speculations of Fed's QE tapering caused capital outflows from those countries, thus weakening their currencies and hurting import demand. Absence of any tapering plan from the Fed in September should be a temporary to these markets. Imports to China are expected to grow further in coming months as signaled by the improvement of "new export orders" sub-index in the September PMI. This suggested that foreign trade might not be a key driver of China's economic growth as expansion in imports appears to be faster than that of exports. Also from China, CPI rose 3.1% yoy in September while PPI dropped -1.3% yoy.

Released elsewhere, Australia home loans dropped more than expected by -3.9% in August. Swiss will release PPI today while The eurozone will release industrial production.

The annual IMF/World Bank/G20 meetings began last week was non-eventful. At noted in the IMF statement, "the eventual transition toward the normalization of monetary policy in the context of strengthened and sustained growth should be well timed, carefully calibrated, and clearly communicated". Indebted countries are urged to implement fiscal plans "flexibly to take account of near-term economic conditions to support growth and job creation, while placing government debt on a sustainable track". Moreover, the fiscal situation in the US was in focus and it is urged to take action to resolve short-term fiscal uncertainties.