The adjusted Japanese current account surplus was substantially weaker than expected at JPY0.35trn from JPY0.32trn previously, which was close to record lows and maintained concerns over longer-term Japanese fundamentals. Given fiscal and trade woes, there were expectations of longer-term yen depreciation.
For now, defensive considerations tended to dominate as US debt negotiations remained the primary focus as markets waited for further political developments. After a slide to near 96.55, the dollar rallied again on fresh signs that a compromise might start to emerge over the US. Despite a recovery back above 97.0, the US currency was unable to make further headway.
There was a weaker than expected reading for US consumer confidence which did little to help underpin the US currency with markets still frustrated by the lack of heavy-weight releases. There were also increasingly lurid headlines over the implications and impact of any debt default.
These fears continued to have a dual impact on the dollar as underlying confidence in the currency remained weak with little expectations that the Fed would be able to taper in October. There was also some evidence of defensive demand for the US unit with fears over a developing dollar shortage. Although there were further negotiating tactics by the House of Representatives and Senate during the day, there was no evidence of a breakthrough as brinkmanship dominated.
The Euro managed to retain an important element of being a defensive asset as underlying fears surrounding peripheral economies were over-shadowed for now. EUR/USD found support above 1.3550 and pushed to challenge resistance in the 1.36 area as dollar selling was the path of least resistance.
Although there were important concerns surrounding risk appetite, the Australian currency performed strongly during the day with initial support from a stronger than expected reading for business confidence which hit a 3-year peak. AUD/USD moved to a high around 0.9480 before drifting weaker.
Sterling briefly dipped sharply during the European morning on reports that the Bank of England would announce a long-term repo operation on Wednesday. Markets initially thought this was a new instrument by the central bank which would have represented a shift in monetary policy and a fresh determination to push market rates down.
GBP/USD dipped sharply to lows around 1.6020, but it was quickly realised that it was an existing policy instrument and Sterling recovered quickly with a challenge on GBP/USD resistance levels above 1.61 early in New York.