While mass firings of federal workers may not significantly alter overall payroll statistics, their real impact is a potential shock to consumer and business confidence. This second-order effect on sentiment is a key underappreciated risk that the market has not fully priced into the US dollar.
During episodes of US government dysfunction, such as shutdowns, the dollar tends to weaken against alternative reserve assets. The concurrent strength in gold and Bitcoin provides tangible market validation for the 'dollar debasement' thesis, suggesting investors are actively seeking havens from perceived fiscal mismanagement.
The absence of key data releases like non-farm payrolls during a government shutdown reduces market-moving catalysts. This artificially lowers volatility, creating a stable environment conducive to running carry trades and maintaining existing positions like dollar shorts, contrary to expectations of increased uncertainty.
A recurring pattern in Yen trading shows markets pricing in a Bank of Japan (BOJ) rate hike ahead of policy meetings, causing the Yen to strengthen. However, the BOJ often fails to deliver. The optimal strategy is to trade this pre-meeting speculation ('trade the rumor') and then reassess before the actual announcement.
COFA data reveals a significant multi-year trend where a bloc of unspecified "other currencies" is steadily gaining share in global reserves. This group has displaced more of the US dollar's declining share than the Euro, Yen, or Sterling, indicating a broad, under-the-radar diversification movement by reserve managers.
A bearish Canadian dollar (CAD) position can act as a superior proxy for a bearish US dollar (USD) view. It provides insulation against temporary USD rallies (as USD/CAD rises) and offers better carry efficiency due to the Bank of Canada's dovish stance, making it a lower-beta, potentially higher-return strategy.