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The Dollar Consolidates as Brinkmanship Continues

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The Dollar Consolidates as Brinkmanship Continues

The dollar consolidated against the yen on Monday as investors continued to wrestle with the brinkmanship related to the US government shutdown. Today’s headlines brought two proposals, one from the House and one from the Senate that are likely to gain little traction. With the US-Japan 10-year differential is gradually widening after reaching almost 190 basis points, a two-month low at the beginning of October the dollar is likely to remain robust.

News from Europe has been limited to the German ZEW and UK CPI figures. While the expectations component of the ZEW improved to 52.8 from 49.6, the assessment of current situation unexpectedly slipped to 29.7 from 31.3. The UK’s Sept CPI was slightly firmer than expected at 2.7% compared to 2.6% consensus expectation. Also in the UK, the country and China have reached some agreements that grant the UK the ability to be the most important offshore center for yuan trading, after Hong Kong. The agreement accounts for a little more than 60% of yuan trading outside of China and Hong Kong.

The dollar did lose ground on Tuesday against the AUD. The Australian dollar traded at four-week highs following the RBA minutes. The minutes reinforce ideas that another rate cut is possible, but not imminent.

The USDJPY continues to trade in a broad range between a downward sloping trend line that connects the highs in May and the highs in September, and an upward sloping trend line that connects the lows in June to the lows in early October. Momentum on the currency pair is positive as the MACD (moving average convergence divergence) index has generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index has move from negative to positive territory confirming the buy signal.

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