The FX market has been only slightly affected by the sell-off in equities. Moreover, even risk-haven currencies, such as the Japanese yen and the Swiss franc, were of limited interest to investors. Overall, the US dollar enjoyed renewed interest from traders. The dollar index hit 90.57 yesterday, up roughly 1.6% on the week. The index’s gains were contained by the appreciation of the Japanese yen.
However, both the Swiss franc and the Japanese yen reversed momentum on Friday with the CHF and JPY down 0.35% and 0.45% against the greenback, respectively. This is somewhat surprising as the US government shut down once again on Friday morning. Investors seem to be not overly fussed about it, which suggests that they remain confident a solution will be find on Friday. Indeed, the lower house is expected to vote early morning.
We see limited risk for further USD weakness as the overall risk-off sentiment is rather dollar supportive for now. However, today will be key as a renewed sell-off in equities ahead of the weekend could trigger a panic reaction. Indeed, investors have always been reluctant to load on risk ahead of weekends. In the FX, this could translate into rising buying pressure in the Japanese yen and Swiss franc. The effect on the greenback is more uncertain.
By Arnaud Masset