U.S. government shutdown is now a major risk for the US dollar; (DXY capped by 50% Fibo retracement)
|- As we get set for a new trading week, albeit with the US out on holiday in honour of Martin Luther King Jr. Day., there are a few noteworthy headlines in the weekend press and we start with the US partial shutdown of the government.
The US stock market got optimistic about not only bullish noise over the progress of Sino/US trade solutions but as the U.S. government’s partial shutdown moved in to its 28th day on Friday, ( a prolonged shutdown is estimated to cut U.S. economic output by about 0.1percent every two weeks), investors cheered some signs that indicated that Trump as about to make an offer to the Democrats. However, weekend news reports that Trump's offer was rejected.
Trump's weekend Twitter frenzy
This lead Trump tweeting like crazy on Sunday, ripping into House Speaker Nancy Pelosi in particular, in which he appeared to threaten to increase deportations of undocumented immigrants living in the United States, defending his proposal to end the partial government shutdown. Pelosi said in a Saturday statement that the proposal was "a compilation of several previously rejected initiatives, each of which is unacceptable and in total do not represent a good faith effort to restore certainty to people’s lives." Trump's proposal included giving circa 1 million immigrants three-year protection from deportation in exchange for $5.7 billion in funding for a wall along the U.S. southern border.
The shutdown will now go into its 29th day once markets return after the national holiday on Monday, but it could become a major risk for markets that are already troubled by the trade wars and a doubling of US budget deficit due to Fed policy to date, and investors might not be able to ignore it any of this for much longer; Afterall, there are some 800,000 federal workers missing paychecks and GDP is calculated to drop 0.1percent every two weeks. As much as 0.2 percentage points off the first-quarter GDP could be shaved if this continues into February, according to Gregory Daco, the chief U.S. economist at Oxford Economics.
At this rate, the US dollar is likely to find a tough time finding bullish traction when the market weighs up the risks of a prolonged government shutdown, damaging US economic growth and investor sentiment. When coupled with no foreseen solution to the Sino/US trade dispute and the Federal Reserve tipped to hold for the near future, the 50% Fibo retracement of the mid Dec decline to YTD lows looks to be a hard resistance to overcome in the DXY, located at 96.37, in line with Friday's closing high.
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