Forex Today: Uncertainty grips markets as US government shutdown continues
Here is what you need to know on Thursday, October 2:
United States (US) lawmakers failed to find a middle ground to end the government shutdown on Wednesday, feeding into uncertainty. The US Dollar (USD) struggles to find demand early Thursday, with the USD Index edging lower for the fifth consecutive trading day. The weekly Initial Jobless Claims and Factory Orders data for August, which were scheduled to be released later in the day, will be delayed until the US government funding is restored. Instead, investors will pay close attention to Challenger Job Cuts report for September.
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Japanese Yen.
USD EUR GBP JPY CAD AUD NZD CHF USD -0.42% -0.74% -1.56% -0.00% -1.09% -0.88% -0.16% EUR 0.42% -0.33% -1.31% 0.41% -0.67% -0.47% 0.26% GBP 0.74% 0.33% -0.89% 0.75% -0.40% -0.14% 0.57% JPY 1.56% 1.31% 0.89% 1.62% 0.53% 0.57% 1.47% CAD 0.00% -0.41% -0.75% -1.62% -1.03% -0.88% -0.18% AUD 1.09% 0.67% 0.40% -0.53% 1.03% 0.20% 0.90% NZD 0.88% 0.47% 0.14% -0.57% 0.88% -0.20% 0.86% CHF 0.16% -0.26% -0.57% -1.47% 0.18% -0.90% -0.86%The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
On Wednesday, the Automatic Data Processing (ADP) announced that payrolls in the private sector declined 32,000 in September. Additionally, the August print of 54,000 got revised down to -3,000. Other data from the US showed the Institute for Supply Management's (ISM) Manufacturing Purchasing Managers' Index (PMI) edged higher to 49.1 in September from 48.7 in August. The Prices Paid Index component of the PMI survey declined to 61.9 from 63.7, while the Employment Index recovered slightly to 45.3 from 43.8. In the European session on Thursday, the USD Index edges lower toward 97.50, while US stock index futures trade mixed.
After rising to a weekly high near 1.1780 on Wednesday, EUR/USD lost its traction in the second half of the day to close virtually unchanged. The pair holds its ground in the European morning and trades at around 1.1750. Eurostat will publish the Unemployment Rate data for August later in the session. On Wednesday, the data from the Euro area showed that the core Harmonized Index of Consumer Prices (HICP) rose 2.3% on a yearly basis in September, matching the market expectation.
GBP/USD builds on its weekly gains and stretches higher toward 1.3500 in the European morning on Thursday.
Gold came in within a touching distance of $3,900 on Wednesday and set a new record-high before correcting lower in the American session. XAU/USD stays relatively quiet and fluctuates above $3,850.
USD/JPY lost more than 0.5% on Wednesday and closed the third consecutive day deep in negative territory. The pair stabilizes at around 147.00 in the European morning on Thursday. Early Friday, labor market data will be featured in the Japanese economic calendar.
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
What are the key assets to track to understand risk sentiment dynamics?Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
Which currencies strengthen when sentiment is "risk-on"?The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
Which currencies strengthen when sentiment is "risk-off"?The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
