Mixed FX impact as shutdown end in sight

USD: No end in sight as jobs market worsens

We highlighted in last week’s FX Weekly (here) the fact that the dollar buying momentum faded somewhat last week and suggested this could mark a turning point and the potential renewal of dollar selling. The absence of US jobs data has helped the dollar but some of the data last week pointed to continued weak economic conditions and Friday’s consumer confidence data in particular suggested worsening sentiment amongst US households. This may be down to the labour market but the government shutdown is likely playing its part as well. It was the Current Economic Conditions Index in the University of Michigan data that stood out, falling sharply to hit a new record low surpassing the low during the global inflation shock. Household finances are an important part of the Michigan sentiment data and it was this that deteriorated markedly with the index also hitting a record low in November.

The Senate was kept in session all weekend by Majority Leader John Thune and it looks like this was a wise decision with news that eight moderate Democrats have reached an agreement with the Republicans to possibly re-open the government. The Senate voted 60-40 on a procedural measure agreeing to advance a bill to end the shutdown. The bill provides full year funding for three of the twelve appropriation bills – the three departments Agriculture, Veterans and Congress will receive full funding with other departments funded through to 30^th January 2026. The Democrats in return extracted concessions like furloughed workers being back-paid, fired workers being reinstated and crucially a vote on extending Obamacare subsidies would be held no later than mid-December. The Democrat leadership has promised to oppose the bill highlighting the divisions within the party.

The reaction in the markets has been mixed. The dollar has advanced most versus the yen but has weakened versus AUD and the DXY is only marginally stronger. This deal could still fail although that seems unlikely now. Of course the end of the shutdown will bring forward NFP data that has been missed and given the jobs data released last week was weak, this may be curtailing the bullish reaction to the potential end of the shutdown. We certainly believe the lack of jobs data has likely benefitted the dollar.

US fiscal concerns could also return quickly after comments over the weekend from President Trump who suggested that a “dividend of USD 2k per person” would be paid to everyone and called those against tariffs “fools” adding that there was “almost no inflation”. Following the poor showing in elections last week it may be that the Trump administration is seeking way to bolster support. If this idea gains traction we may well see renewed selling in the UST bond market and a steepening of the yield curve as the long-end starts to fret about debt sustainability again. The bond market has recovered in part on reduced concerns over fiscal policy given the reported revenues being made by tariffs. Another tax cut on top of the measures already taken in the One Big Beautiful Bill would see a considerable uptick in inflation concerns. Scott Bessent suggested the USD 2k was an estimate of the measures in the OBBB and not necessarily new additional tax cuts but it wasn’t clear. Trump isn’t helping his cause with the Supreme Court deliberating by citing “trillions of dollars” from tariffs that will help pay down the debt. The White House counsel argued in front of the Supreme Court judges last week that the tariffs were nothing to do with raising revenues.

US CONSUMER CONFIDENCE IN CURRENT CONDITIONS AT RECORD LOW

Source: Bloomberg, Macrobond & MUFG GMR

JPY: BoJ hike in December possible

JGB yields are rising along with UST bond yields in reaction to the news that the government shutdown could be close to ending. However, the yen has seen little support from rising JGB yields and is the under-performer in G10 FX. JGB yields are also higher in reaction to the release of the initial summary of the BoJ meeting that took place on 30^th October. The details of the summary certainly points to the scope for a rate hike in December. As Governor Ueda had mentioned there is now renewed focus on the annual round of wage negotiations to determine whether the conditions are in place for a rate hike. One BoJ member cited assessing the “initial” evidence on wage agreements that pointed to the potential for a rate hike sooner. It is clear to us that the BoJ reason for caution is increasingly lacking credibility and if the global economy continues to show resilience, the reason for delaying a rate hike is lacking.

There was also a speech today from Junko Nakagawa, who stuck largely to the standard communication confirming that a rate hike would be warranted if the economy and inflation conditions unfolded as expected. Nakagawa also stated that she was closely monitoring the US economy and trade policies abroad. If that’s the case, the end of the government shutdown would be one less risk although the jobs data to be released could still raise concerns over the outlook.

The strength of the dollar in response to the potential end of the government shutdown is likely to be curtailed until we get the missed US jobs reports that could underline weak labour market conditions. With AI-related equity valuations in question we doubt this risk-on reaction to the potential end of the government shutdown will last long and the scope for further yen selling from current levels looks limited.  

10YR JGB YIELD HITS A NEW HIGH ABOVE THE 1.70% - THE HIGHEST LEVEL SINCE 2008

Source: Macrobond, Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com