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Dollar Down as Government Closes; Abe Tax Drops USD/JPY Under ¥98

Dollar Down as Government Closes; Abe Tax Drops USD/JPY Under ¥98

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- US government to shutdown as Congress fails…again.

- Italian government under pressure – vote of confidence on Wednesday.

- Complacency in markets – bonds, commodities, equities, and FX – likely finished.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.51% (-0.81%prior 5-days)


The Dow Jones FXCM Dollar Index has taken a significant step downwards towards today, falling within points of its September and post-FOMC meeting lows as political turmoil in the United States reached a new low as the federal government shutdown. Bogged down by political ideologues on both sides of the isle, partisanship is now a veritable drag on US economic growth, which will be a major factor for the Federal Reserve not to taper QE3 at its October policy meeting.

Political tensions have risen on both sides of the Atlantic in recent days, although the Italian situation may be defusing as reports have emerged that up to 20 ex-Berlusconi supporters could fall in line with current Prime Minister Enrico Letta in order to prevent a collapse of the government. Such events would no longer necessitate elections, removing a fair deal of uncertainty from the near-future. Accordingly, the Euro has benefited from declining credit risks (noted below).

As the US government debacle festers, the Japanese Yen has benefited amid a shift in safe haven preferences, as well as a generally broader decline in risk-appetite. Aiding the leg up for the Yen today was news that Japanese Prime Minister Shinzo Abe would move forward with a sales tax hike, raising the rate from 5% to 8%. Concurrently, the government will cut corporate taxes to offset the fiscal drag.

Why is this JPY-positive? Investors are finding that the Japanese economy is strong enough to withstand a minor downturn in economic growth; and that momentum is strong enough to prevent inflation from becoming deflation. As long as economic data remains strong out of Japan, the scope for more monetary easing from the Bank of Japan is limited in the short-term.

USDJPY 5-minute Chart: October 1, 2013 Intraday

Dollar_Down_as_Government_Closes_Abe_Tax_Drops_USDJPY_Under_98_body_x0000_i1027.png, Dollar Down as Government Closes; Abe Tax Drops USD/JPY Under ¥98

Taking a look at European credit, rumors of a potential solution in Italy have eased concerns significantly on Tuesday. The Italian 2-year note yield has decreased to 1.803% (-7.1-bps) while the Spanish 2-year note yield has decreased to 1.386% (-9.0-bps). Similarly, the Italian 10-year note yield has decreased to 4.527% (-3.6-bps) while the Spanish 10-year note yield has decreased to 4.213% (-7.5-bps); lower yields imply higher prices.

Read more: Euro Drops on Weaker German Labor Market, European PMIs


Dollar_Down_as_Government_Closes_Abe_Tax_Drops_USDJPY_Under_98_body_Picture_1.png, Dollar Down as Government Closes; Abe Tax Drops USD/JPY Under ¥98

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--- Written by Christopher Vecchio, Currency Analyst

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