FX Thoughts Ahead Of ECB Press Conference

 | Oct 02, 2013 07:52AM ET

A brief update as we await European Central Bank president Mario Draghi’s press conference today in the wake of the ECB meeting.

US government shutdown to drag on
The US government shutdown won’t result in chaos or a US default but it is likely to drag on for some time. The longer it does drag on, the more it could weigh on risk appetite and favour the USD (as well as the JPY). Some market watchers are throwing around estimates suggesting 0.2 percent of GDP per week is the cost of the shutdown – so we could quickly get to 0.5 percent and keep the Federal Reserve on hold through the end of the year if it goes on for three weeks. In any case, we’ll all have to be aware of the ad hoc risks as statements and headlines roil markets. The nightmare scenario is one in which we get temporary measures that allow spending to resume for a few weeks or more, only to result in a repeat of the same exercise when that temporary funding has run its course. It appears the budget and the debt ceiling are being rolled into one big bargaining process that both sides will use for political input for the 2014 mid-term election campaigns. The most impressive move, as others have pointed out, would be for Obama to invoke the 14th amendment and start up the US government by executive order, though this might only take place after at least two more weeks of going nowhere.

Abe's speech
The reaction to Japanese Prime Minister Shinzo Abe’s policy speech yesterday is rather telling. He did go ahead with the sales tax announcement, which was supposed to be JPY bearish because the Bank of Japan has specifically said that it would consider the tax as an additional policy trigger for more easing and yet here we are looking at new multi-week lows on the day – a very telling set-up that the downside risks for JPY crosses predominate, barring a strong comeback in risk appetite or signs of accord in the political developments in the US (way too early for this). This all being said, the sales tax hike won’t even go into effect until April next year – way beyond this market’s attention span for now.

Chart: USDJPY
Note that we are through key local support levels, though we’ve yet to develop significant momentum in the pair. Other JPY pairs are looking increasingly technically bearish as well, with EURJPY having followed through a bit on its recent reversal (though we need to see the other side of all of today’s ECB risk). The downside targets are now below 97.00 (200-day moving average) and ultimately much lower if we take the summer lows into account. Note the 'head and shoulders-like' feel of the chart and the neckline we are about to hit, though orthodox head and shoulder formations should theoretically not have so much slope.