Shanghai drops on profit-taking. Eyes on building US debt ceiling stress and uncertain political tensions

By Raiko Shareef

Commodity-related and emerging market currencies trail the leaderboard in a broadly USD-positive evening.

Poor performances in Asian and US equities, as well as lower oil prices, appear to be the driver.

Data releases were sparse. We’d note the weakness in Japan’s exports, despite its very competitive exchange rate, highlights the weak global demand that has hindered manufacturing globally.

Nevertheless, JPY was actually one of the better performers of the evening, thanks a relatively defensive risk tone. The Shanghai Composite Index dropped 3.0%, its sharpest fall in October. Investors looked to be taking profit as the index approached the technically pivotal 3500 level. The S&P 500 once again failed to breach topside resistance, with doubts growing about how far this recovery can extend.

CAD was the worst-performing major currency, thanks to the tailwind of falling oil prices, and then hit by the BoC’s new growth forecasts. While the Bank left rates unchanged, as expected, it pared expected GDP growth in 2016 to 2.0%, citing lower oil and gas investment.

NZD flirted with the 0.67 level before rebound back to 0.6730. We’d be keeping an eye on broader risk sentiment, especially Asian equity markets, for a guide on NZD in the near-term.

It’s worth noting that the US is set to hit its debt-ceiling in just under two weeks. Yesterday’s news that Paul Ryan will consider stepping up as Speaker of the House provided a glimmer of hope that the Republican party, which holds a majority, can come to the table to avoid a government shutdown. But the theatrics are not over. The conservative faction that brought down the incumbent Speaker Boehner and his anointed successor McCarthy is not sold on Ryan. Should that faction fail to signal its support by Friday, it’s back to square one, and a significant setback to hopes of a deal. The US Treasury expects to hit the debt ceiling on 3 November, and analysts estimate Treasury will run out of cash by 10 November.

Tonight, we expect to hear the ECB express its readiness and ability to ease policy further, should it become necessary. We’re wary the market may be disappointed if there is no overt signal of imminent QE expansion.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.