The dollar has suffered from rising risk of a US government shutdown and falling oil prices since the weekend, with the yen emerging as the top performer. President Trump said that a shutdown tomorrow is now likely after little progress on congressional negotiations.
A lower USD/JPY may well remain the favourite trade during the shutdown. It lost 1.5% during the 2018-19 shutdown, and is currently trading 1% above its short-term fair value, according to our model.
On the oil side, our commodities team has been highlighting downside risks for energy prices into year-end, and we continue to see that playing in favour of the yen and euro, and against the dollar and CAD.
Focus today will also shift back to US data, as the week of jobs data starts with the closely monitored JOLTS report for August. Remember the July issue was bad, with job openings dropping and layoffs accelerating. Conference Board Consumer Confidence data for September is also out today: consensus is expecting a deterioration from 97.4 to 96.0. Fedspeak includes Bostic, Jefferson, Collins and Goolsbee.
Today’s numbers can be quite impactful on the dollar, which now has a more balanced positioning and embeds a less pessimistic macro view compared to a couple of weeks ago. There is currently an 8bp gap between market pricing (42bp) for year-end and the Fed’s median Dot Plot projection, which, in our view, raises the bar for further hawkish repricing and lowers it for a revamp of dovish bets. This means downside risks for the dollar.
That said, we cannot ignore that US data momentum has improved, and our economics team sees room for an upside surprise in US payrolls, which are scheduled for release on Friday, but might be delayed due to the shutdown.
Francesco Pesole
Source: FX Daily: US government shutdown to favour the yen
