USD/JPY :Yen Improves As Shutdown Grips US

 | Oct 02, 2013 07:49AM ET

The yen continues to post gains against the US dollar on Wednesday. In the European session, the pair is trading in the mid-97 range. The US government shutdown is now its second day, as Republicans and Democrats continue to spar over how to end the budget crisis. In economic news, Japanese Monetary Base continues to rise and beat the estimate. Over in the US, the ISM Manufacturing PMI looked solid on Tuesday, beating the estimate. Wednesday’s key event is the ADP Non-Farm Employment Change. The markets are expecting very little change from the September release. Later today, we’ll hear from Federal Reserve Chair Bernard Bernanke and FOMC member Eric Rosengren. There are no Japanese releases on Wednesday.

In Japan, the Monetary Base continues to rise, climbing from 42.0% in August to 46.1% in September. This beat the estimate of 45.3%. There was good news earlier in the week from the well-respected Tankan indexes. The Tankan Manufacturing Index jumped from 4 to 12 points, easily beating the estimate of 7 points. The Tankan Non-Manufacturing Index also rose, rising from 12 to 14 points, matching the forecast. This was the best showing for both indicators since November 2007, and is further indication that the Japanese economy continues to pick up steam.

The US shutdown continues, as Congress remains in a partisan deadlock over how to come to some agreement over the federal budget. With the government lacking funds to operate, it has been forced to close non-essential services and send almost a million government workers home. The Republicans and Democrats are entrenched in their positions, but public pressure may force the politicians to get their act together quickly. If things are resolved sometime this week, it will have been more of a nuisance than a crisis. However, a much more serious crisis could occur in two weeks if Congress doesn’t reach an agreement on raising the debt ceiling. If that happens, the Treasury would be unable to pay all of its bills and the economic fallout could be tremendous.

The Federal Reserve surprised the markets in September when it didn’t taper QE, and the next dates to circle are October 29- 30, when the Fed holds its next policy meeting. Employment data will be an important factor in the Fed’s decision, and the US will release ADP Non-Farm Payrolls later on Wednesday. The all-important Non-Farm Payrolls, due for release on Friday, faces cancellation if the government shutdown continues.