Upcoming events may lead to an end to the US government shutdown. Concerns over potential Thanksgiving flight delays and the postponement of food aid payments have prompted some Democrats in the Senate to support a compromise bill.
USD/JPY continues to rise above 154 despite expectations for a December rate hike by the Bank of Japan. Meanwhile, progress on the shutdown may impact risk-sensitive FX cross rates more than the US Dollar, which was recently pressured by weak consumer sentiment data.
Economic Data and Market Influences
The upcoming week sees little US economic data due to the Veterans’ Day holiday. Tomorrow’s NFIB small business optimism index release and several Federal Reserve speakers could shape market expectations. The probability of a December 25 bp Fed cut has decreased to 64%, with further cuts less likely as Fed speakers lean towards caution.
In other markets, EUR/USD holds steady above 1.1550, while GBP/USD nears 1.3200 on renewed US government hopes. Gold climbs above $4,100 per troy ounce, while Bitcoin rises to $106,000, reflecting optimism over the potential resolution of the shutdown. Key cryptocurrencies indicate a possible market recovery as momentum indicators show a decline in bearish trends.
With progress on ending the US government shutdown, we should anticipate a decrease in near-term market volatility. This suggests selling volatility, perhaps through short straddles on equity indices, as the removal of uncertainty typically compresses option premiums. Looking back, we saw a similar pattern after the lengthy 2018-2019 shutdown, which was followed by a sharp equity rally once a resolution was found.
Market Strategies and Currency Movements
The US Dollar Index (DXY) seems capped around the 100.00 level, creating an opportunity for bearish dollar strategies. Given that poor consumer sentiment and layoff data were already weighing on the dollar, a risk-on rally may not be enough to push it higher. Traders could consider buying put options on the DXY with strike prices near 99.90, reflecting the view that this level will act as strong resistance.
We see a clear risk-on signal in the currency markets, especially with AUD/JPY moving higher in tandem with US tech stocks. This reinforces the yen’s role as a funding currency, where its weakness is being exploited to buy higher-yielding assets. Buying call options on AUD/JPY is a direct way to play this momentum, especially as the market continues to ignore the possibility of a Bank of Japan rate hike.
The odds of a December Fed rate cut are diminishing, falling from over 64% and potentially heading towards 50%. This repricing means that derivatives tied to short-term interest rates, like SOFR futures options, will see adjustments. We should consider reducing bets on an imminent rate cut, as Fed speakers continue to signal a cautious approach to easing policy.
