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The Case for a Dollar Relief Rally

The Case for a Dollar Relief Rally

Boris Schlossberg, Technical Strategist

Talking Points:

  • Why Shutdown Costs Could Be Overblown
  • The Case for a Dollar Relief Rally
  • All-Important US NFP Data Due Tuesday

It's been an extremely quiet start to the trading week with most major currency pairs tracing out very narrow 20-point ranges during the Asian and early-European sessions. It certainly seems as if traders are simply biding their time while preparing for tomorrow’s September US non-farm payrolls (NFP) report, the release of which was delayed by the US government shutdown.

With the debt debate and shutdown now over (for now), the FX markets are trying to get back to business as focus begins to shift from political news to economic data. The key question going forward will be just how much the political impasse cost the US economy at large.

There is no doubt that the standoff in DC soured consumer sentiment and certainly reduced some government demand in Q4, but with all the furloughed government employees assured their back pay and the quick resumption of government work, the overall impact may wind up being be less than initially feared.

The fact that the US budget negotiations were resolved well before the key Christmas selling season may also be a positive for Q4 US GDP. In short, after being battered for the better part of the month, the US dollar (USD) may be due for some relief as bargain hunters begin to probe for a near-term bottom.

The Case for a Dollar Relief Rally

While all the high-beta currencies remain relatively well bid against the buck while supported in part by slightly better risk sentiment, the dollar has shown some small gains against the Japanese yen (JPY) with USDJPY popping through Friday's highs of 98.15.

The only economic report of note was the Japanese trade balance, which recorded its 15th consecutive monthly deficit and printed at JPY -1.09 trillion versus -1.06 trillion projected. Exports were up 11.5% versus 15.4% expected, and Imports increased 16.5% versus 19.9% forecast.

Comments from Bank of Japan (BoJ) governor Haruhiko Kuroda provided nothing new for the market, but the central bank leader did note that the Japanese economy was recovering moderately and that CPI is likely to rise gradually. Kuroda reaffirmed the BoJ's commitment to continue easing until the 2% inflation target is reached and remained stable at that level.

One of the key reasons why the dollar continues to perform better against the yen as compared to other major currencies is because Japanese policymakers remain highly accommodative while trying to match the Federal Reserve step for step in terms of monetary policy.

The All-Important Data Point This Week

For now, monetary authorities in other G10 nations have taken a decidedly nonchalant attitude to recent dollar weakness. However, if US economic data continues to disappoint and pushes the dollar lower, the rhetoric from US trading partners is likely to become more cautionary.

All eyes will turn to tomorrow’s US NFP data with markets anticipating a print near the 180K level. If the numbers are close to expectations, the greenback could see a relief rally as the week wears on.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.