Dollar Mixed As US Government Began Shutdown

Dollar was initially sold off last week as US started the first partial government shutdown in 17 years. DOW followed by breaking through 15000 psychological level and reached as low as 14947. Nonetheless, both the greenback and stocks recovered towards the end of the week. Dollar has indeed closed mixed and was not the weakest one. Instead, adjustment on rate expectations triggered late selloff in the pound and made it the weakest major currency. On the other hand, for the same reason, Aussie was boosted towards the end of the week and was the strongest major currency. The highly anticipated non-farm payroll release from US was delayed due to the shutdown and the situation made it hard for Fed to gauge the economic recovery, and for economists to gauge the timing of Fed's tapering.

While that was the first government shutdown in US in 17 years, markets seemed to have taken it rather lightly. Some analysts noted that the situation now is merely a political drama and there would be resolutions soon. Nonetheless, it should be noted again that according to the Treasury, US government will run out of borrowing measures on October 17. And if there is still no agreement on raising the debt limit, US government might have the first default in history. The CBO has already estimated that US would be unable to pay its bills sometime between October 22 and 31. So the situation will be closely watched in coming days.

Sterling's sharp selloff was attributed to readjustment rate expectations. Some analysts noted that after a string of solid economic data, markets have gone too optimistic in forecasting growth in UK and the timing of stimulus removal and rate hike. But BoE governor Carney reiterated earlier this week that, "we're not going to begin to think about raising interest rates or tightening monetary policy until we see the conditions in the economy where the economy is really growing." Meanwhile, fiscal impasse in US could also delay the recovery in UK.

Aussie, on the other hand, was boosted by news that two major Australian banks, Westpac and NAB, are now expecting another RBA cut in 2014. Earlier, both forecast a cut before the end of this year. RBA left rates unchanged at 2.50% earlier in the week. Meanwhile, Japanese prime minister Abe announced the VAT hike finally and introduced a JPY 5T stimulus plan to offset the impacts. ECB left rates unchanged and pledged to consider all options to support growth.

Technically, European majors' selloff towards the end of the week argued that they may be topping against dollar and commodity currencies. Among them, Sterling was clearly the weakest with sign of reversal in EUR/GBP. Commodity currencies were the strongest. But it should be noted that the strength in the AUD/USD was not that impressive and it's still limited below recent high at 0.9528. The USD/CAD looked completing recent recovery, but it's still kept above 1.0274 minor support. The UD/CAD edged higher to 0.9762 last week and faced some resistance from a medium term fibonacci level. There is risk of near term reversal in AUD/CAD even though it's far from being confirmed. Price actions in the USD/JPY remained choppy with yen having a mild upper hand. The EUR/JPY and GBP/JPY showed sign of reversal. The CAD/JPY's late recovery suggests that it might have bottomed, while AUD/JPY struggled in range.

The overall picture suggested that it's time to trade reversal in the markets, rather than trend following. There is no clear confirmation of reversals yet at this stage but the risk reward ratios looked promising. Canadian dollar is the preferred currency to buy. While the GBP/CAD looks like the best pair to sell, we already had EUR/CAD short in place. Thus, we'd prefer to keep the EUR/CAD short instead. Other than Canadian dollar, we believe yen could be another currency to buy against European majors. Thus, we'd prefer to short GBP/JPY this week, as Sterling should be pressured by further rebound in the EUR/GBP.

So to conclude, our strategy of the EUR/USD long was correct last week but considering the risk of reversal, we will close it out. The EUR/CAD recovered further but was kept below our stop at 1.41. Late selloff argues that the EUR/CAD is finally reversing. Thus, we will keep the short position. In addition to that, we'll try to sell the GBP/JPY at around current level, with stop above 158 and target medium term trend line at 152 first. We'll consider to sell more of the GBP/JPY if it takes out 154.67 support decisively.