Dollar Tumbled Sharply As Fed Expected To Delay Tapering

Last week, US lawmakers finally ended the drama just ahead of the October 17 deadline and reached an agreement to re-open the government through January 15, 2014 and increase the debt limit to February 7. Meanwhile, the Treasury was specially allowed to continue issuing debt for several months even if the US runs up against the debt ceiling again in five months time. Reactions in the financial markets were quite clear. S&P 500 closed at new record high of 1744.5 on strong risk appetite. Dollar tumbled sharply, with dollar index closing at 79.654, the lowest level since February. Both the 10 year yield and 30 yield closed lower.

The main factor that attributed to the moves was expectation that Fed will delay tapering of the asset purchase program. According to S&P, the 16 day partial government shutdown was estimated to have taken USD 24b out of the US economy in Q3. That is, Q4 GDP growth was lowered own from 3% to 2.4%. Also, investors should bear in mind that the debt negotiation was just delayed, not solved. And, markets would face the same uncertainty again early next year. That should keep Fed's hand from dialing back stimulus. Also, it should be noted that Yellen would most likely take up the Fed chairman job in January and her dovish stance could maintain stimulus even further. According to a Bloomberg survey, Fed may now cut back the bond buying in March instead of December. The immediate focus will now be on the non-farm payroll report to be released on Monday.

Technically, firstly, it should be noted that dollar was the weakest currency overwhelmingly on Fed expectation. Aussie and Kiwi were the two strongest currency last week on risk appetite. And both have resumed recent rally against dollar, Europeans and yen. However, Canadian dollar was dragged down by US dollar and was indeed the second weakest currency. Yen was the third weakest currency on risk rally naturally. European majors were generally strong against dollar EUR/USD extended recent rise from 1.2755 and closed close to 1.3710 resistance while momentum remained strong. GBP/USD was kept below recent high while USD/CHF was held above recent low. But these levels will likely be taken out soon. Relative strength among European majors was not clear but EUR/CHF did show sign of topping.

Regarding trading strategy, the anticipated rebound in Canadian dollar didn't happen yet. The intra-week dip in EUR/CAD offered some hope but was quickly dented with the late rebound. We'll stay short first for reversal but will definitely stop out all position on break of 1.4127. The AUD/JPY long was correct even though it's less strong then AUD/USD. We'll stay long in AUD/JPY for another week of rise with stop at 93.2. Development in dollar European offers good opportunity. But we'll hold off our hands for a week first to see whether EUR/USD could take out 1.3710 decisive, when EUR/GBP will extend rebound or reverse, and whether EUR/CHF will really reverse.