Upcoming events could lead to an end of the US government shutdown. Concerns about possible Thanksgiving flight delays and delays in food aid payments have caused some Senate Democrats to support a compromise bill. The USD/JPY continues to rise above 154, even with expectations for a December rate hike by the Bank of Japan. At the same time, progress on the shutdown may affect risk-sensitive FX cross rates more than the US Dollar, which has faced pressure from weak consumer sentiment data.

Economic Data and Market Influences

Next week, there isn’t much US economic data due to the Veterans’ Day holiday. Tomorrow’s release of the NFIB small business optimism index and comments from several Federal Reserve speakers could influence market views. The chance of a 25 basis point Fed cut in December has dropped to 64%, with further cuts seeming less likely as Fed officials adopt a cautionary stance. In other markets, EUR/USD remains stable above 1.1550, while GBP/USD approaches 1.3200 due to renewed hopes for the US government. Gold has risen above $4,100 per troy ounce, while Bitcoin climbs to $106,000, reflecting optimism about the possible resolution of the shutdown. Key cryptocurrencies suggest a potential market recovery, as momentum indicators show a reduction in bearish trends. With progress towards ending the US government shutdown, we can expect decreased market volatility in the near term. This indicates potential opportunities for selling volatility, such as short straddles on equity indices, since the removal of uncertainty usually lowers option premiums. A similar pattern was noted after the lengthy 2018-2019 shutdown, which was followed by a strong equity rally once a solution was found.

Market Strategies and Currency Movements

The US Dollar Index (DXY) appears to be capped around the 100.00 level, creating a chance for bearish dollar strategies. As poor consumer sentiment and layoff data already weigh on the dollar, even a risk-on rally may not lift it significantly. Traders might consider purchasing put options on the DXY with strike prices near 99.90, indicating that this level will serve as strong resistance. A clear risk-on signal is evident in the currency markets, especially as AUD/JPY rises alongside US tech stocks. This highlights the yen’s role as a funding currency, with its weakness being used to buy higher-yielding assets. Buying call options on AUD/JPY is a straightforward way to capitalize on this momentum, particularly since the market seems to overlook the possibility of a Bank of Japan rate hike. The likelihood of a December Fed rate cut is decreasing, now falling from over 64% and potentially heading closer to 50%. This change means that derivatives connected to short-term interest rates, like SOFR futures options, will likely see adjustments. We should consider reducing bets on an upcoming rate cut, as Fed officials continue to signal a cautious approach to policy easing. Create your live VT Markets account and start trading now.

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