US Dollar Faces Uncertainty as Government Shutdown Looms

USD: More uncertainty as government shutdown looms 

The US dollar has strengthened modestly today with the positive day for equities yesterday turning to a less favourable day today in Asia as investor concerns increase over the prospect of a government shutdown. In order to reach the 60-vote threshold in the Senate to pass stop-gap funding bill (continuing resolution) that passed the House on Tuesday night the Republicans require the support of at least seven Democrats and the Senate minority leader, Chuck Schumer confirmed last night that there would be no support for the bill.

One Democrat has indicated support but in addition one Republican has indicated he would vote against the bill. The continuing resolution would essentially extend the funding to match current spending agreements for a 6-month period until 30th September, but would also allow for cutting back some non-defence spending and increase defence and immigration control spending. But  the Democrats are concerned this provides too much scope and have offered a one- month extension to 11th April. This would allow the time for alterations to the current agreement. However, the House is now adjourned so getting the a new deal agreed seems unlikely ahead of the current funding expiry on Friday evening. 

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The last government shutdown was during Trump’s first term in office in December 2018 and was the longest ever at 35 days. With some appropriations bills passed back then the furloughed worker total of 380k was smaller than some in previous shutdowns. On this occasion the numbers would likely be larger and reinforce the uncertainty at a time when Doge and Elon Musk are taking action to aggressively cut federal government employees. Yields have not reacted to this potential disruption with yesterday’s CPI data highlighting the potential for the core PCE data to reveal another solid m/m gain. 

Still, US equity futures are down about 0.5% and we would expect risk appetite to  remain fragile into the end of the week. That could well be to the benefit of JPY. JPY- crosses are all lower today with JGB yields higher. The JGB move was helped by news  that one of Japan’s larger unions – UA Zensen – had agreed a 5.37% pay increase for  workers. While down from the 5.91% level last year, it remains well above the long- term average and signals something similar on a national scale. 10-year US-JP yield  spreads continue to signal JPY appreciation ahead with risk dynamics also reinforcing upside JPY risks.