Market Overview: Positive Developments Spur Risk Appetite

The potential resolution of the longest US government shutdown in history in the coming days has invigorated risk sentiment globally, lifting equity markets across the board while leaving the US dollar relatively unchanged. The dollar shows a mixed performance against G10 currencies, with the Japanese yen continuing to face downward pressure amid rising US interest rates. Leading the appreciation against the dollar are the dollar-bloc currencies and the Scandinavian currencies.

Currency Markets: Emerging and Developed Currencies

Among emerging market currencies, the Indian rupee, Turkish lira, Thai baht, and select Central European currencies are posting modest declines. Conversely, the South African rand, Malaysian ringgit, and South Korean won are demonstrating strength and leading gains within the emerging market currency complex.

Equity Markets: Significant Gains Across Asia Pacific and Europe

Major Asia Pacific indexes rose by over one percent, with the Nikkei, Hang Seng, and South Korea’s Kospi showing notable gains. The Kospi surged approximately 3%, buoyed by prospects of a dividend tax reduction and an anticipated increase in domestic equity allocation by a local pension fund. European equities followed suit, with the Stoxx 600 advancing 1.4% by mid-morning, marking its strongest one-day gain in six months.

In the US, futures for the S&P 500 are trading nearly 1% higher, while Nasdaq futures show a gain of about 1.5%.

Fixed Income: Mixed Rate Movements Across Regions

Asia Pacific benchmark 10-year government bond yields have increased by 2 to 4 basis points. In Europe, sovereign yields display a mixed pattern, with risk premiums on peripheral bonds narrowing versus German bunds. The 10-year US Treasury yield remains just below 4.13%, shy of last week’s peak near 4.16% and well below October’s high of approximately 4.20%.

Commodities: Gold Rebounds, Oil Stabilizes

Gold prices have rebounded by around 2% after three consecutive weeks of declines, surpassing the 20-day moving average at about $4080 for the first time in over two weeks. The next resistance level is anticipated near $4135. December West Texas Intermediate (WTI) crude oil is trading quietly within the range established last Friday, which itself was contained within Thursday’s broader band between roughly $58.85 and $60.50.

Currency Detail

United States Dollar (USD)

The US Dollar Index is consolidating within last Friday’s range of approximately 99.40 to 99.85, retracing a bit over half of the rally following the Federal Reserve’s hawkish rate cut in late October. The current retracement zone lies near 99.20-99.25, close to the 20-day moving average. Should the recent top represent a turning point, a deeper retracement of the advance from September 17th could materialize, with an initial Fibonacci target around 98.75.

Despite the ongoing government shutdown, emerging reports of an imminent reopening deal sparked an initial dollar high in early Asia Pacific trading, with lows recorded during European hours. The economic calendar remains sparse today, with only a bond market closure scheduled tomorrow for a holiday; equity markets will stay open.

Money market pressure has abated somewhat, yet tight financial conditions persist due to low bank reserves compounded by the unusually high Treasury General Account (TGA) balance—a seasonal and shutdown-induced accumulation delaying federal spending. Unlike in prior episodes, the Federal Reserve’s standing repo facility availability provides liquidity support, helping smooth systemic pressures.

Euro (EUR)

Since mid-last week, the euro has retraced approximately 61.8% of its decline following the Fed’s hawkish action late last month. Last week’s high closed near $1.1595, coinciding with the 20-day moving average. Today’s price action has been subdued, trading within $1.1540 to $1.1585. Resistance lies around $1.1620, while the pre-Fed cut peak is near $1.1670. Notably, options expiring today account for 1.14 billion euro at the $1.1600 strike.

Upcoming economic focus centers on Germany’s November ZEW survey, scheduled for tomorrow. The current assessment has deteriorated over the past three months, standing at -80 in October after a -93.1 close for 2023. However, expectations have risen for two consecutive months, suggesting improving investor sentiment.

Chinese Yuan (CNY)

Following the Fed’s rate cut, the US dollar moved up from just below CNH 7.09 to nearly CNH 7.14 mid-last week. It found support around CNH 7.12 but slipped today to approximately CNH 7.1185, a five-day low. The People’s Bank of China (PBOC) has been recalibrating the dollar reference rate recently, setting it today at CNY 7.0856, marginally adjusted from recent fixes.

Over the weekend, China reported October Consumer Price Index (CPI) and Producer Price Index (PPI) data. CPI posted a 0.2% year-on-year increase—the highest since January—despite persistent food inflation weakness, with food prices still 2.9% below last year’s levels. Non-food inflation remains positive, lifting core CPI to 1.2%. Producer prices remain in deflation at -2.1% year-on-year but have moderated from deeper declines earlier in the year.

Japanese Yen (JPY)

The US dollar experienced a sharp jump against the yen from about JPY 151.55 on October 29 to JPY 154.45 the following day, later retreating to just below JPY 153 before the weekend. The 61.8% Fibonacci retracement of that move lies near JPY 152.65, with the 20-day moving average close at JPY 152.55. Renewed US Treasury yield increases linked to potential US government reopening boosted the dollar to almost JPY 154.25 today. Immediate support is seen near JPY 153.80.

Market participants await Japan’s September current account data tomorrow, which year-to-date has averaged a surplus of approximately JPY 2.62 trillion per month, slightly above the first eight months of 2024. The trade deficit on a balance of payments basis has also narrowed compared to earlier this year.

British Pound (GBP)

Sterling underperformed since the October Federal Reserve meeting, reaching six-month lows last week. However, as the US dollar softened broadly near the end of last week, the pound rallied to a six-day high around $1.3175, extending further today to about $1.3185. Near-term upside potential targets the $1.3230-$1.3265 region, supported by options expiring Wednesday with GBP 940 million at $1.3230.

Following the Bank of England’s decision to hold rates steady last week, tomorrow’s UK labor market data is unlikely to majorly influence rate expectations for the December meeting. Market pricing currently assigns over a 70% probability to a rate cut in December, potentially lowering the base rate to 3.75%, with terminal rates around 3.50% and some chance of easing to 3.25%.

Canadian Dollar (CAD)

Canada’s economic calendar is light this week, and markets will close tomorrow for Remembrance Day. Since the simultaneous Fed and Bank of Canada rate cuts in late October, the Canadian dollar has depreciated, reaching a low near CAD 1.4140 last week. The 50% Fibonacci retracement of this year’s losses sits near CAD 1.4165.

Stronger US dollar flows and a decline in Canada’s unemployment rate pushed the US dollar to a three-day low of around CAD 1.4055. Subsequent declines today tested the CAD 1.40 level, with support identified near CAD 1.3985, corresponding roughly to the 61.8% retracement of the recent rally.

Australian Dollar (AUD)

The Australian dollar formed an inside trading day before the weekend within a narrow range just below $0.6500. Today, it surged to nearly $0.6540, reaching the 50% retracement level of the downtrend initiated at the end of last month. The next retracement level of 61.8% lies just above $0.6555. Nearly A$450 million worth of options expire today at $0.6560.

The Reserve Bank of Australia’s recent pause in policy changes and today’s benign bank surveys are unlikely to significantly influence expectations for next month. The futures market assigns an approximately 15% chance of a December rate cut. Tomorrow will feature housing loan value data.

Mexican Peso (MXN)

The peso demonstrated resilience ahead of the weekend, appreciating roughly 0.30% against the dollar despite a more than 1% decline in both the S&P 500 and Nasdaq. The US dollar peaked near MXN 18.77 mid-last week and approached the week’s lows near 18.4650 before the weekend. Today, the dollar has been sold slightly below MXN 18.37, with nearby support around MXN 18.34.

Following last week’s overnight policy rate cut to 7.25% and October’s CPI release, Mexico will report September industrial production tomorrow. Given that Q3 GDP is already published, this data is unlikely to significantly alter Banxico’s policy outlook. Swap markets anticipate scope for further rate cuts, potentially pushing the policy rate below 7.0% if external and domestic conditions warrant.

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**Disclaimer:** This analysis is intended for informational purposes only and does not constitute investment advice or recommendations.