As government shutdown deadline approaches, USD struggles

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· Japanese reverses course following Fin Min Aso comments on corporate tax rates

· Cable goes on a tear following BoE Governour Carney’s QE Comments

· Debt Ceiling takes center stage as Sept 30th deadline approaches, Greenback struggles

The Japanese Yen appreciated overnight, outperforming almost all major currencies, on comments from Financial Minister Taro Aso that seemed to contradict a newspaper report yesterday which spurred speculation that corporate tax cuts are in the cards. Aso commented that any policy changes must be considered from a medium- or long-term perspective and that right now he was not thinking of lowering the effective corporate tax rate. Aso also noted that he wasn’t keen on the idea of issuing new debt to fund economic stimulus that could offset the drag from the expected increase in Sales Taxes.

Yesterday the Yen had been on the defensive as markets saw a corporate tax cut as increasing the supply of money and its velocity, thereby diminishing its relative value. Following Aso’s comments the reverse argument played out and the Yen advanced widely, its most impressive gains being against the Australian Dollar. The AUDJPY tumbled to multi-week lows as the prospect of an American government shutdown also weighs on so called ‘high-beta’ or ‘high-yield’ currencies like the Aussie. Bucking the trend the Swiss Franc stood its ground against the JPY overnight. The Swiss Franc has been one of the key beneficiaries of the US Debt Ceiling/ government shutdown story, as safe haven flow make their way into the landlocked mountain country. Since the Fed decided not to taper the Franc has taken over 2 cents off of the value of the Greenback on its way to match values not seen since January 2013.

During the European session Bank of England Governor Mark Carney, while speaking about the growing UK recovery during an interview commented that “My personal view is, given the recovery has strengthened and broadened, I don’t see a case for quantitative easing and I have not supported it”. The Cable popped over 50 pips on the news and has been grinding its way towards the 8-month high achieved on the day the US Federal Reserve chose not to Taper. The Sterling took ground from the Euro as well, the pair also approaching multi-month highs.

With the deadline for a government shutdown fast approaching there doesn’t appear to be much compromise happening. The opposition Republican Party officials are pushing for laws that would tie an increase of the debt cap with spending cuts, looser environmental regulation, and delaying Obamacare. Meanwhile the Obama administration has accused Republicans of blackmail and being irresponsible with the economy and the future of everyday Americans to further their own causes.

Comments from a Moody’s analyst suggests that should the US government be unable to reach an agreement and be forced shutdown a close lasting a few days would likely have a limited impact on the economy; where as if it were to last for 3 to 4 weeks it could cut 4th quarter growth by as much as 1.4%. The Analyst goes on to note that a shutdown of 2 months or longer risks plunging the US economy directly back into a recession. Also it’s important to consider the implications for investor confidence on a global scale should the US Government miss a debt payment and go into default.

As investors ponder the likelihood of various outcomes the US Dollar has tumbled, closing in on multi-month lows just ahead of 80.00. So long as the spending issue remains unsolved it’s difficult to get particularly excited about the USD. That being said, if the past is any indication, should a solution be arrived at look for the Big Dollar to get a massive boost. With this in mind, should you have direct exposure to the USD or not, now is a good time to call your hedging specialist and discuss how to best prepare yourself for what may happen in the coming days and weeks.

Further reading: 5 Most Predictable Currency Pairs – Q4 2013

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About Author

David Starkey is a currency options dealer and market analyst for Cambridge Mercantile Group. A fascination with the everyday impact of globalization on society led David to pursue a degree in International Business from the University of Victoria. From there Forex was a natural fit. He has worked as a currency trader, risk manager, and hedging expert in both Canada as well as the United States for several non-bank brokers. Cambridge Mercantile Group.

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