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US Dollar Set for Continued Drop as Budget Agreement Stabilized Markets

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October 20, 2013 By: , No Comments

US-Dollar-300x170

Forex markets have seen a wild month thus far, with political uncertainties leading to major whipsaws in price activity.  Increased market volatility of this type creates the possibility of achievingenhanced gains if forex traders are aware of the critical events that are likely to push markets in one direction or the other.  For these reasons, it is highly important for forex traders to remain aware of the fundamental drivers at play so that the appropriate positions can be taken and the currencies with the greatest potential for movement can be bought and sold against one another.

The latest market moves have been driven by the announcement that the US Congress and Senate has made headway in defining an agreement to raise the national debt ceiling, prevent further government shutdowns, avoid credit defaults, and outline a workable budget that does not significantly impede GDP growth.  This, of course, is a tall order.  But at this stage it looks as though the Republicans and Democrats have all the necessary tools in place to get the world’s largest economy back to business.  So, this should be good for the US Dollar, right?

Not exactly.  The sum effect of this disruptive government shutdown is to reduce fourth quarter productivity by nearly $25 billion.  This will make it much more difficult for the US Federal Reserve to start phasing out on its QE stimulus programs as previously expected.  So while the end of the government shutdown does help improve on the prospects for US GDP growth, the opposite it actually true for its effects on the national currency.

The Week Ahead in Forex Markets

Looking ahead to next week, most of the attention will remain centered on the changing expectations for the potential strategy to start phasing out QE stimulus programs.  Any indication that the Federal Reserve will be unable to carry out these types of strategies will likely put greater pressure on the US Dollar, and bring buyers back into high yielding currencies like the New Zealand and Australian Dollars.  In addition to this, any market evidence that places investor attention back on yields themselves with also put pressure on the Japanese Yen, as this will suggest a wholesale return back into carry trades.

The initial market reactions in the earliest parts of the week will be telling.  At the moment, there is little to suggest that recent declines in the Dollar can start to abate any time soon.  So, if we see these bearish moves in the greenback as the Asian markets return to trading on Monday, the stage is likely set for much larger extensions of these trends.  Remain aware of the Non Farm Payrolls release, which is scheduled for Tuesday.  Scheduled changes from the US government shutdown could catch some traders off guard, so it will be important to prepare for increased volatility during the Tuesday session.

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