USD/JPY Extends Losses as T-Bill Yields Continue to Rise

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Currency traders are twiddling their thumbs this morning on what should have been an otherwise busy and exciting day in the foreign exchange market. This month’s non-farm payrolls report was supposed to help the Federal Reserve decide whether asset purchases should be tapered this year or next and now everyone has to wait for the government to reopen for an update on U.S. labor market conditions. The longer the wait, the greater the chance the Fed will defer reducing asset purchases to 2014 because of the impact on not only this month’s jobs report but also the next. Business and consumer spending could also take a hit as the shutdown moves into its second week, which explains why the dollar continued to grind lower against the Japanese Yen.

U.S. one-month Treasury bill yields rose to its highest level in 4.5 years today, a sign that investors are growing more worried about default risk. However the losses in USD/JPY are modest and the greenback is actually rebounding against the EUR and British pound. This price action suggests that many FX traders share our view that that Congress will reach a resolution and avert a catastrophic default before time runs out. While there were no U.S. economic reports released today, we have heard from a few Federal Reserve Presidents this morning including 2 FOMC voters but none provided much clarity on monetary policy. According to Fed President (non-voter) Fisher, the US “can’t dare to default on its debt.” So far FOMC voter Dudley didn’t touch on the topic of tapering or the government shutdown and the same is true for FOMC voter Stein.

Meanwhile the only economic report released during the North American session was Canada’s IVEY PMI index. Manufacturing conditions in Canada expanded less than expected in the month of September. Economists were looking for IVEY PMI to rise to 53.6 from 51 but instead, the index rose to only 51.90. Yet the CAD held onto its gains because of the sharp rise in the employment component of the report, which jumped from 43.6 to 53.5. This mixed report should keep USD/CAD confined in a 1.02 to 1.04 range.

Kathy Lien
Managing Director

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