How Is Big Money Betting on the Shutdown's Resolution? Here's What Currency Pairs Show

By Tim Thielen  OCT 14, 2013 12:21 PM

This outcome in Washington this week is a binary event for global risk markets.

 


The US equity markets put on what traders would label a "face-ripping" rally last week on the hopes and rumors that US Republicans and Democrats would be coming to an agreement on the budget and spending issues that would allow the government to get back up to full speed and for the debt ceiling to be raised. 

When reports came out Sunday morning in the US that steps were actually taken in the wrong direction in the discussions, you could almost feel the mood of global investors turning sour once again.  This morning, however, the political cabal is out in the press talking up a potential solution by Thursday – but nobody seems to be jumping back on the bullish bandwagon yet.

It is quite clear that the resolution or failure to resolve in this situation is a binary event for risk markets – especially the US equity markets.  It just may be that an actual deal must be announced before anybody really reacts any further.

So, where are we on the key charts? Can they tell us anything about what “big money” is doing in advance of this week’s events?

ASSET CLASS UPDATES

Bonds
 

Treasury yields actually showed a little movement to the upside last week as money flowed from safety to risk assets in a hurry.  However, that may all change this week (not today, as the US bond markets are closed in observance of Columbus Day).  If no resolution is reached in DC before bond markets open Tuesday, don’t be surprised if yields to threaten short-term support at 2.605% again and possibly break to new short-term lows.
 
Stocks 

So far, the weakness in US stocks (shown below by the S&P 500 (INDEXSP:.INX) e-Mini Futures contract - @ES) is just a partial give-back of last week’s rally.  Support comes in at 1677, 1670, and 1663 – all three of which are Fibonacci retracements of last week’s sharp rally.  Resistance obviously comes in at Friday’s high of 1700.25 and is backed up by the 9/19 high of 1726.75.  I believe there will be a positive resolution to DC’s problems this week, so I would be using a pullback to one of the support levels to buy into stocks if you are not already involved.


 
Currencies

US Dollar Index


There may be one more little hurdle to jump at 80.51 for the US Dollar Index (DXY) bulls to officially be in the clear.  Above that level, the next resistance would be 80.75. If resistance holds at 80.51 or lower – as it seems it might – we could still see a drop all the way down to the wave “C” target at 79.00.



Aussie Dollar / Japanese Yen

Perhaps the most widely-used proxy for “risk” in the currency arena is the Australian dollar / Japanese yen cross (AUDJPY).  As one would expect, the AUDJPY rallied sharply last week – enough so that the 93.004 horizontal line resistance was conquered on a closing basis.  That break of resistance meant to me that there are higher levels still ahead for theAUDJPY -- and for risk assets in general. 


 
SUMMARY

So, while the DXY and Treasury yields are less than clear and convincing in their presentations, the AUDJPY and even the S&P futures are trading bullishly – even in pullbacks like today.  I, for one, think that cooler heads will prevail in Washington this week – which should remove one burden from the markets.  Then we can shift our attention to other “normal” risks, like earnings and global growth (which came into some doubt this weekend with the poor trade balance data out of China).

Twitter: @seachangereport

No positions in stocks mentioned.

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