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Japanese Yen Rallies, Aussie Suffers as US Fiscal Issues Remain Elevated

Japanese Yen Rallies, Aussie Suffers as US Fiscal Issues Remain Elevated

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Day seven of the US government shutdown and few signs of resolution.

- US debt limit hit on October 17 (10 days).

- ‘Feels like 2011’ with safe havens (CHF, JPY, USD) rallying against commodity currencies (AUD, CAD, NZD).

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.05% (-0.42%prior 5-days)


Friday’s hopes for a budget deal have seemingly faded as market participants have started to come to terms with the reality of the United States’ political impasse. With the US government on day six of its shutdown, few signs have emerged that leaders from either political party will back down from their ideological platforms, increasing the likelihood of further unease as the debt limit approached on October 17.

Regardless of political affiliation, the continued uncertainty over the United States’ fiscal future is a poor development for risk trends and the US Dollar. In fact, markets are starting to behave similarly to how they did in July 2011. At that time, market observers focused on “risk on” versus “risk off “ conditions – necessitated by the tightening of correlations amid heightened sensitivity to news headlines.

Now, cross-asset correlations have started to realign, suggesting that investors are once again seeing the world through the narrow lens of “risk on” versus “risk off.” The AUDUSD and S&P 500’s rolling 20-day correlation has tightened back to +0.73 as of today, from +0.41 on September 9, and -0.03 on August 5. In context of recent moves in US Treasuries, there are growing signs that the US debt debacle is no longer just on the periphery of investors’ minds.

The safe havens – the Japanese Yen and the Swiss Franc – should stand to benefit above all else if the October 17 deadline creeps forward without any tangible resolution in sight. The US Dollar should benefit too, especially against the commodity currencies; though we would expect USDCHF and USDJPY to remain under pressure.

AUDJPY 5-minute Chart: October 7, 2013 Intraday

Japanese_Yen_Rallies_Aussie_Suffers_as_US_Fiscal_Issues_Remain_Elevated_body_x0000_i1027.png, Japanese Yen Rallies, Aussie Suffers as US Fiscal Issues Remain Elevated

Taking a look at European credit, the Italian 2-year note yield has increased to 1.629% (+0.4-bps) while the Spanish 2-year note yield has decreased to 1.324% (-1.9-bps). Likewise, the Italian 10-year note yield has increased to 4.292% (+0.1-bps) while the Spanish 10-year note yield has decreased to 4.194% (-0.2-bps); lower yields imply higher prices.

Read more: Should US Fiscal Tensions Ease, Euro Will Ultimately Gain


Japanese_Yen_Rallies_Aussie_Suffers_as_US_Fiscal_Issues_Remain_Elevated_body_Picture_1.png, Japanese Yen Rallies, Aussie Suffers as US Fiscal Issues Remain Elevated

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--- Written by Christopher Vecchio, Currency Analyst

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