Yen Tipped by ING to Outperform on U.S. Govt. Shutdown
- Written by: Sam Coventry
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"The yen could emerge as an outperformer as a hedge to the U.S. entering a government shutdown tomorrow," says ING analyst Francesco Pesole, ahead of Tuesday's deadline for the U.S. Senate to pass crucial legislation.
The government needs to pass a spending bill by close of play Tuesday to raise the country's debt ceiling and ensure funds flow to government departments to fund day to day functions.
A shutdown starting on Wednesday risks raising financial market uncertainty and denting U.S. economic growth, which currency analysts suggest could impact negatively on the dollar.
"The dollar has suffered from rising risk of a US government shutdown and falling oil prices since the weekend, with the yen emerging as the top performer," says Pesole.
According to U.S. Vice President JP Vance, the U.S. government is on track to shut down "because the Democrats won’t do the right thing".
President Donald Trump has meanwhile warned of a the mass firings of federal workers if government shutdown is not averted.
Expectations for rising unemployment could, at the margin, raise the odds of a more proactive Federal Reserve in the coming months, opening the door to more interest rate cuts.
Classic FX theory suggests this would weigh on USD, with the yen, the go-to safe-haven alternative, benefiting.
"A lower USD/JPY may well remain the favourite trade during the shutdown. It lost 1.5% during the 2018-19 shutdown, and is currently trading 1% above its short-term fair value, according to our model," says Pesole.