Flipping coins in the Washington fog

The FX market has finally shifted out of its early-week lethargy and into a more animated state, with the USDJPY caught in two tows—Washington’s political theatrics and Tokyo’s quiet tightening drumbeat. It feels less like an orderly chess match and more like a poker table where players are bluffing with shaky hands, and the yen has just been passed the chips.

The dollar index’s stumble back under the 98 handle yesterday set the stage. For all the Fed-centric narratives of recent months, the greenback now trades on the stage of Capitol Hill. The looming shutdown has turned the world’s reserve currency into collateral damage, with markets less interested in the fine print of fiscal bills and more focused on the credibility of governance itself.

A shutdown in itself is rarely an actual macro wound—more a flesh cut that heals quickly—but this time the risk carries a sharper edge. President Trump’s threat to permanently fire furloughed workers turns a familiar script into something more sinister, opening the door to litigation and prolonged dysfunction. That raises the probability of missed economic data releases—nonfarm payrolls this Friday now hangs in doubt, which is the FX equivalent of trading blindfolded. Without fresh labour market signals, positioning gets noisier, liquidity thinner, and the dollar’s compass spins.

That vacuum is where the yen thrives. USD/JPY has already drifted lower toward 147.85 into London, a level that appears less like a floor and more like the top of a possible trapdoor if the lights go out on Capitol Hill. In past shutdowns, the yen has proven a reliable hedge—climbing 1.5% during the 2018-19 impasse—and the current setup looks similar, if not stronger. On valuation screens, the USDJPY is about 1% rich( on Tokyo political dysfunction) versus short-term fair value. Traders are happy to sell it when Washington starts stumbling.

Adding weight is Japan’s own evolving backdrop. The two-year JGB yield has risen to 0.95%, a new high that signals markets are actively pricing a Bank of Japan hike as soon as next month. The last auction of 2-year paper saw the weakest demand ratio since 2009—a sign that investors no longer want to hold low-yielding JGBs in a world where policy normalization feels imminent. Layer on the BoJ minutes showing two outright dissents for a hike and a broader chorus hinting conditions are ripe, and the market narrative shifts: Japan is no longer the perennial laggard in the rate cycle. For years, the yen’s role was to fund everyone else’s bets. Now, the carry anchor is loosening, and every step up in JGB yields adds ballast under the currency.

What we’re watching is a collision of two forces: a U.S. political system flirting with paralysis and a Japanese central bank gingerly signalling a policy pivot. For dollar-yen, that means the path of least resistance tilts lower unless, of course, the shutdown proves just another chapter of political brinkmanship.

What makes this dollar dip especially biting is the rate positioning. Market pricing already sits nearly 10 bp below the Fed’s dots. That gap means the curve can easily catch up on the dovish side—weak JOLTS data or a shutdown shock would be enough to push pricing to a full two-cut scenario. By contrast, it would take a significant upside surprise to revive hawkish conviction amidst the government shutdown and talk of permanent layoffs.

Oil’s stumble only adds to the pressure. Brent’s failure to reclaim $70 on renewed OPEC+ supply chatter keeps energy tilted lower into quarter-end. For Europe and Japan, that shift improves terms of trade, strengthening their external balance sheets just as U.S. uncertainty mounts. It’s a tailwind that amplifies relative outperformance, leaving EUR/USD pressing toward 1.180 as traders fold in today’s CPI from France and Germany against the backdrop of Washington’s dysfunction.

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The USD/JPY short has been the gift horse of the week, and I never kick a gift horse in the mouth, espeically where we were staring at 150 on Friday. Being short USD/JPY from the lofty 148.50–149.95 zone has been a bet not just on rates and spreads, but on the shifting tectonics of Tokyo politics. With the LDP's reformist wing gaining traction, the narrative for a less hesitant Bank of Japan has only grown louder, and the market has started to take notice.

But the driver of the latest leg lower has come from a continent away. Washington’s shutdown drama has morphed into a foggy coin toss — will they stumble into yet another last-minute reprieve, or does the clock run out this time? Markets hate uncertainty more than bad news, and that’s what the dollar has been forced to swallow. Each soundbite from Capitol Hill feels like a dealer shuffling cards without ever dealing, leaving positioning jittery and liquidity skittish.

That’s why I’ve taken some profits here. When Washington politics and yen policy speculation collide, the volatility becomes binary. Heads, the shutdown gets patched and the dollar bounces; tails, the lights go dark and the yen finds another bid. In either case, I’ve already pocketed a decent move, turning paper into absolute P&L.

Gold’s long squeeze

In recent sessions, bullish momentum in gold has drawn in a fresh wave of “Johnny Come Lately” longs—momentum traders, momentum-cross strategies, and FOMO speculative bets, driven by the idea that “we missed the rally, so let’s chase it.” The tape had “buying pressure” written on it, and many were willing to ride that wave. The narrative was straightforward: the USD was under pressure, rate cut bets were ahead, and the Washington shutdown risk was rising. The latter is likely not the best reason to go long at the top of the year-long bullish run.

But that kind of positioning also builds a fragile house of cards, especially when too many players are jammed into the same crowd. The longer you have crowding on the ladder, the more vulnerable the structure becomes to a sudden reversal.