USD mixed as risk mood brightens - Scotiabank

The US Dollar (USD) is starting the new week out on a mixed note. News of a potential breakthrough in government shutdown negotiations in the Senate has lifted risk appetite and boosted stocks, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Risk assets latch on to US government re-opening expectations

"It is not clear whether any emerging agreement would get the necessary support (from Democrats) in the House, however. A report confirming that China is lifting its export ban on some rare earths added to the pro-risk mood. Commodity/high beta FX is leading gains on the session while the JPY (especially) and the CHF are underperforming. Major bond markets are mostly softer. The USD ended last week on the defensive."

"The dollar's rise from mid-September is looking tired and gains last week peaked around noted resistance for the DXY (200-day MA/August highs). While last week's ISM data was robust, weak labour market and sentiment data underscore threats to the outlook. The plunge in the U. Michigan confidence data might be passed off as a reflection of partisan politics. But the split in responses might also reflect the wealth divide and the K-shaped US economy, reflecting the gap between wealthier and poorer Americans."

"A significant setback for stocks, amid ongoing concerns about broader market valuations, could curb consumption by wealthier Americans who may have been doing much of the heavy lifting in consumer activity. No (economic) news has effectively been good news for the USD. If government re-opening talks do progress, caution on the USD may increase as a resumption of key data releases will help shape Fed rate cut expectations into year end. Calendar risk is light today and Remembrance Day/Veterans' Day tomorrow may keep activity on the light side."