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Forex Today: US Dollar slides as government officially shuts down

Here is what you need to know on Wednesday, October 1:

The US Dollar (USD) remains under bearish pressure on the first trading day of the fourth quarter after US Congress failed to pass a funding measure and avoid a government shutdown. The US economic calendar will feature ADP Employment Change and ISM Manufacturing Purchasing Managers' Index (PMI) data for September later in the day.

The US federal government has officially shutdown as Republicans refused to include an extension of the enhanced Affordable Care Act premium subsidies in the funding bill. The USD Index dropped to a weekly low below 97.50 with the immediate reaction, before recovering toward 97.70 in the early European session. Meanwhile, US stock index futures were last seen losing between 0.7% and 0.9% on the day, pointing to a bearish opening in Wall Street. It's also worth noting that some of this week's upcoming macroeconomic data releases, namely the weekly Initial Jobless Claims and September Nonfarm Payrolls, could be delayed unless the funding is restored.

US Dollar Price This week

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.

USDEURGBPJPYCADAUDNZDCHF
USD-0.43%-0.53%-1.56%-0.09%-0.88%-0.37%-0.41%
EUR0.43%-0.10%-1.28%0.33%-0.47%0.05%0.00%
GBP0.53%0.10%-1.09%0.44%-0.41%0.15%0.11%
JPY1.56%1.28%1.09%1.52%0.71%1.07%1.21%
CAD0.09%-0.33%-0.44%-1.52%-0.76%-0.29%-0.33%
AUD0.88%0.47%0.41%-0.71%0.76%0.51%0.47%
NZD0.37%-0.05%-0.15%-1.07%0.29%-0.51%0.11%
CHF0.41%-0.00%-0.11%-1.21%0.33%-0.47%-0.11%

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).

Gold benefits from the risk-averse market atmosphere and trades at a fresh record-high above $3,870 in the European morning on Wednesday.

EUR/USD clings to small daily gains at around 1.1750 early Wednesday. Later in the session, Eurostat will release the preliminary Harmonized Index of Consumer Prices (HICP) data, the European Central Bank's (ECB) preferred gauge of inflation, for September.

The data from Japan showed earlier in the day that the Tankan Large Manufacturing Index edged higher to 14 in the third quarter from 13, while the Non-Manufacturing Index held steady at 34, as anticipated. USD/JPY remains under strong selling pressure for the third consecutive day on Wednesday and trades at its lowest level in nearly two weeks near 147.00.

After closing in positive territory for the third consecutive trading day on Tuesday, GBP/USD continues to stretch higher and trades above 1.3450 in the European morning on Wednesday.

AUD/USD stays in a consolidation phase at around 0.6600 after rising more than 0.5% on Tuesday. In the meantime, USD/CAD extends its sideways grind above 1.3900.

Risk sentiment FAQs

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.

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.

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.

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.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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