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Stocks up, USD lower on US debt limit agreement

Good morning

Running a bit late this morning so I’ll do my best to keep it brief. The Senate voted through the US debt limit deal which means the US avoids a default and the can is kicked down the road until Jan 2025. US stocks ended higher and Asian markets also had a strong session , Hang Seng in particular was up almost 4%. US dollar has weakened against GBP and EUR, they are now 1.2530 and 1.0765 which means GBPEUR is 1.1635.

Why the USD weakness? Well I’m thinking it’s a combination of better risk sentiment, as those higher stock prices suggest, plus the notion that Fed will ‘skip’ a rate rise this month. Feds Harker said yesterday there should indeed be a ‘skip’ and the odds of a rate rise are down to above 30%. I’m still not convinced, particularly now the debt agreement is done and dusted. However if USD weakens on signs of a pause, what on earth will happen to GBP and EUR when their respective central banks announce a slowing, or a stop in rate rises.

AUD has pushed a bit higher after they announced a smaller than expected rise in the minimum wage, GBPAUD which had been near 1.9200 yesterday is now back to 1.8935. GBPNZD is also lower at 2.0550. To be honest with the improvement in Hang Seng and AUD I’d really been expecting to see some bullish China trade or growth announcements but unless I’m missing something all I can see is growing concern over China growth and a weaker CNY.

A light calendar today, really just the US nonfarm payrolls. I say ‘just’, of course its an important release and one that could push USD one way or the other depending on the result. A strong reading with little or no adjustment to the previous release could see USD a touch higher, while anything that looks slightly weak could be enough to convince the markets a ‘skip’ in rate rises is the right thing and USD may end the week lower.

Volatility levels seem low despite the US employment numbers. I’m tempted to look at cheap Monday expiry options. Buying a 1.2500 gbpusd put and a 1.2550 gbpusd call costs just over £3,500 for £1m notional, which makes a breakeven just about 50 pips either way. Similar cost for EURUSD with eurusd put 1.0750 and eurusd call 1.0775. They seem a cheap way to play what could be a decisive number in the June ‘raise or skip’ quandary.

Have a splendid weekend. Weather should be good, I might be off to Epsom tomorrow for the Derby. I’m not a huge race horse fan but my eldest son got offered some tickets and he’s pretty keen so its only fair that I tag along. As long as he drives!

- 13.30 US nonfarm payrolls


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