By Michael O’Neill

Just as September rolled into October the US government rolled from open to closed. The annual Republican/Democrat budget dance ended without a deal—one side was Hip Hopping, the other free-styling, and everyone’s toes were getting crushed.

Republicans, (GOP) including President Trump and House Speaker Mike Johnson, argue that Democrats caused the shutdown by insisting on extra policy measures—especially an extension of enhanced Obamacare (Affordable Care Act) tax credits and increased health care subsidies.

Democrats, led by Senator Chuck Schumer and Rep. Hakeem Jeffries, claim the shutdown is a result of Republican refusal to negotiate or include protections for millions facing rising health insurance premiums as pandemic-era subsidies expire.

They argue that the GOP’s proposed spending plan would roll back health coverage, cut Medicaid, and reduce funding to key public health agencies (CDC, NIH) at a time when Americans need them most.

Neither side seems to care that the paychecks for hundreds of thousands of government employees will be delayed or that Americans won’t have access to many government services.

Same Stuff-Different Day

Since 1976, America has racked up 21 government shutdowns — a track record that makes Italy’s revolving-door governments look steady. The very first came in September 1976 when Gerald Ford vetoed a funding bill, and Congress couldn’t agree on how to keep the lights on. Although it took just 10 days to carve out a deal, it became the template on how politicians could weaponize fiscal policy.

Ford’s successor, Jimmy Carter refined fiscal policy weaponization as he presided over five government shutdowns between 1977 and 1979, which lasted a total of 57 days.

Ronald Reagan took government closures to the next level. Reagan combined volume with staying power: eight shutdowns that together stretched 22 days.

The 21^st century ushered in a new era of fiscal decorum, and Republicans and Democrats managed to get past their difference without shutting down the government. That was until Barack Obama thought it was a good idea to expand health care coverage to all Americans. Republicans were opposed to the idea, and they shut down the government for 16 days.

Donald Trump gets the Most Days Lost award.  He shut down the government for a record 35 days over funding for his pet project, a southern border wall. He didn’t get his way, but it set the stage for today’s US government shutdown.  

Familiarity Breeds Contempt

There are no shortages of things for traders to be worried about. Tensions in the Middle East are inflamed. Trump has presented a 20-point peace plan to end the Israeli/Hamas war which many believe has too many conditions which Hamas cannot accept. If they don’t, Trump promised “consequences.” The escalating tensions in Europe over Russia flying military aircraft into NATO space could easily turn nasty. Meanwhile Trump’s tariff barrage continues unabated. Then there is the Fed— will US rates fall another 100 bps by the end of Q2 2026? Will the Fed lose its independence to the White House? Considering all the above, the 22^nd US government shutdown is more comedy than drama.

Government Shuts Down—Traders Tune Out

The most recent government shutdown between December and January 2019 was largely ignored by FX traders.  They were more interested in the Fed’s abrupt pivot from hawkish to dovish. At the time, the Fed hiked rates, but the Dot-plot projections pointed to fewer rate hikes. Fed Chair Jerome Powell noted “cross-currents.” A mix of global and domestic factors. 

Sound familiar?

The Fed cut rates last week with Mr. Powell shifting his focus from inflation to jobs. Powell flagged rising stress in the labor market, with younger workers, minorities, and new grads feeling the pinch. Hiring is “very, very low,” he warned, and any wave of layoffs could quickly push unemployment higher. The signal was obvious: the Fed’s priority has flipped to defending a fragile job market at risk of contraction.

Traders and analysts may find it more difficult to assess the current US employment market because the Bureau of Labor Statistics announced it was suspending the release of economic statistics during the shutdown.

For the Canadian dollar, the Washington drama is a sideshow. The bigger issue is the deteriorating Canada and US trade relationship which worsened (again) after Trump slapped additional duties on Canadian softwood lumber last week. The negative prospects for the Canadian economy, the risk of sharply lower oil prices and widening CAD/US interest differentials will offset  any gains from a weaker US dollar.

Shutdowns come and go, but the Fed, oil, and tariffs still move the needle. Who needs a government anyway?”