Markets had been expecting opening gaps in Asia on Monday and there were significant moves, although no dramatic shifts for the major currencies as the state of limbo persisted ahead of October 17th Treasury deadline for being unable to meet full payments. Liquidity was an issue with Tokyo closed for a holiday on Monday with US trading volumes also dampened by the Columbus Day holiday.
As far as the economic data is concerned, there was a deterioration in risk appetite following the latest Chinese trade data with fresh doubts surrounding the global outlook which provided some degree of support to the yen while the Chinese inflation reading did not have a major impact.
Talks between House speaker Boehner and President Obama broke down during Saturday. Senate negotiations continued throughout the weekend with a focus on moderate Republicans as they attempted to reach a deal. Again there was no immediate positive outcome and talks were set to resume later on Monday.
G20 issued a thinly-veiled attack on the Administration and there was also tough rhetoric from Chinese sources with strong criticism of US policies with a call for quick action. This tough rhetoric was important in curbing dollar demand with uncertainty a key feature.
The dollar dipped lower at the start of Asian trading on Monday, but the US currency managed to hold above the 98 level and consolidated at lower levels. Although there was a high degree of caution, markets overall still expected a last-minute deal to stave-off default.
There were no major European data releases during the day and there was nervousness over the potential for verbal intervention by the ECB to curb Euro gains. For the second week running, there was no update to the speculative positioning data from the CFTC which created further confusion over underlying market positioning.
EUR/USD found support below the 1.3550 level and gradually edged higher during the European session. The lack of liquidity was significant and the pair popped higher during new York hours with a move towards the 1.36 level as USD/CHF again tested support around 0.9070.
There was optimism surrounding the UK housing sector with confidence restrained to some extent by caution ahead of inflation and unemployment data due later this week. GBP/USD found support close to 1.5950 before moving higher to test resistance just above 1.6000, in line with wider dollar vulnerability.