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As time goes on, it’s apparent that the yen is the place to be if you want to take a view on the US government shutdown. The dollar continues to be under pressure and for the most part, the yen is benefitting. Crucially, USDJPY moved below its 200-day moving average yesterday for the first time since mid-November last year and the risk is that more long-term yen bears are forced to bail out if this is breached on a closing basis. The single currency is still doing well, but with speculation of more policy action from the ECB, on either rates or liquidity, then it is struggling to win out against the yen. We pointed out yesterday that FX markets appear to be rather oblivious in terms of future volatility risks to the US budget and debt situation, but there’s little doubt that the dollar is taking it on the chin a lot harder as compared to the summer of 2011.

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Data/Event Risks

GBP:  Production data is seen at 08:30 GMT, with this and the manufacturing series seen rising 0.4%. Trade data is also seen improving modestly. Growth is seen holding up relatively well in the third quarter and data in line or firmer should continue keep this this perception in place and supportive for sterling.

USD:  The Fed minutes for the September meeting are released. This was the meeting where tapering was not announced, sending the dollar lower. The debt ceiling and government shutdown have taken over in deciding the near-term direction of the dollar, but the extent to which this scenario featured in their thinking will be of most interest. If it was the reason for holding back, then it will be dollar supportive as resolution will bring tapering forward. If not, then delay will be seen as more sustained and therefore dollar negative.

Latest FX News

USD:  The dollar recovering as Obama is set to confirm Janet Yellen as his candidate for the next person to lead the US Federal Reserve when Bernanke’s term runs out in January of next year. The firmer dollar tone comes from the removal of uncertainty and continuity, rather than any judgement on Yellen’s policy leaning. Note that 2 year yields are marginally lower in the US.

EUR:  Another brief breach above the 1.36 level during Asia trade, but the firmer dollar tone has pushed EURUSD back to the 1.3550 by the start of the European open.

AUD:  The Aussie the strongest performer over the past week, which given the uncertainties surrounding the US is remarkable in itself. Aussie has been recovering vs. the Kiwi for the past four sessions and the good performance of the Aussie reflects the fact that currencies are a relative game and with the dollar out of favour, the Aussie stacks up relatively well in comparison.

Further reading:

ERU/USD Oct. 9 – Dollar Strengthens as Yellen to Head Fed

Janet Yellen officially nominated as next Fed Chairwoman – USD buys the fact