USD/JPY Breaks 200dma

The White House warmed up to a short-term deal as a solution to the stalemate remains elusive and USD/JPY broke a key level. The yen was the top performer while USD and CAD lagged. China returns from holiday and Japan releases current account data later.

A rumor of a 6 month continuing resolution deal boosted the US dollar early in US trading but it was a false alarm. We stress that it's extremely unlikely any deal will be leaked or rumored before it hits the mainstream media. Both parties employ departments to spin news and the race to claim victory in any battle means a rush to make announcements.

The pop in USD / JPY sprang from support near the late August low of 96.80. Despite the strong bounce, a soft close in stocks led to a breakdown and the pair continued lower to briefly break the 200 dma at 96.65. It was the first break of the key moving average since November and points to further trouble ahead.

The tone in Washington is not hopeful and neither side is giving ground. The debt ceiling is now tied to a budget deal and a solution to either is unlikely until at least Friday. Even when a deal comes it could be a disappointment. The White House opened the door to an extension of as little as six-weeks. We struggle to see how that term is enough to forge any kind of lasting deal and the uncertainty will continue to weigh on sentiment.

In the short-term, the market will be focused on the re-opening of Chinese markets after a week of holidays. The World Bank cuts its China forecast Monday and traders will be eager to react to the stalemate in Washington.

Also on the schedule, at 2350 GMT, Japan releases current account data and expected to show a 520 billion surplus. At 0045 GMT, the focus turns to China and the HSBC/Markit Services PMI. The prior reading was 52.8.