Weekly Market Overview

US Dollar and Trade Developments

The US dollar extended its rally yesterday and is currently consolidating those gains in a manner indicative of continued strength. The recent retreat from the greenback’s monthly peak has been minimal. This movement comes amid several key trade developments, including multiple US trade agreements and a truce with China, though skepticism remains regarding its durability. Meanwhile, the Federal Reserve signaled resistance to a rate cut in December, causing futures markets to lower the probability of such an event from near certainty to approximately two-thirds. Emerging market currencies have shown mixed performance, with notable highlights including the People’s Bank of China (PBOC) fixing the dollar at its lowest level since October earlier in the week before stabilizing, and the Argentine peso rebounding by 3.6% following election results.

Equity Markets and Bond Yields

The Nikkei index continued its weekly advance, rising 2.1% today and reaching a 6.3% increase for the week. Most major regional equity markets, with the exception of South Korea’s Kospi, weakened today. The MSCI Asia Pacific index, however, is set to close the week with gains and will mark its seventh consecutive month of positive returns. In Europe, the Stoxx 600 has declined for the fourth straight session, equaling its longest run of losses since June, yet it remains on track for a fourth consecutive monthly gain. US equity futures, buoyed by Amazon and Apple, are trading higher following yesterday’s weaker session. The S&P 500 and Nasdaq are positioned to close the month with their sixth and seventh consecutive monthly gains, respectively. European and US 10-year benchmark yields have inched higher today, with the US Treasury 10-year yield climbing about 12 basis points this week to near 4.10%, the largest increase among G10 peers. Gold prices have weakened, set to record consecutive weekly losses for the first time since July. Meanwhile, December WTI crude is hovering near $60, down approximately 2% for the week.

Currency Analysis

US Dollar (USD)

The combination of the Fed’s hawkish stance on rate cuts and promising signs of an easing in US-China trade tensions have propelled the Dollar Index to a monthly high just below 99.70. Since reaching this peak early in the North American session yesterday, the index has sustained levels above 99.40. Today’s consolidation close to this peak appears constructive, with potential upside targeting the 100.00 to 100.25 range. October marks the second consecutive month of appreciation for the Dollar Index, which has strengthened roughly 2% this month despite declining yields, a looming US government shutdown, and the anticipation of the Federal Reserve’s second rate cut this year. These gains reflect market positioning, optimism that the recent rise in Washington-Beijing tensions was mainly prelude to fresh trade talks, and relative underperformance in Europe and Japan. Legislative activity remains limited, though the US Senate has symbolically acted to mitigate tariffs on Brazilian steel and to end the “emergency” status justifying various tariffs, measures awaiting House approval.

Euro (EUR)

The euro initially held above $1.1600 during the European morning session but retreated to approximately $1.1545 after the entry of North American market participants, just above the month’s low. The single currency remains pressured, trading marginally above earlier support near $1.1575. A breach below $1.1540 would expose limited technical support until the late July and early August lows around $1.1400. Conversely, a recovery above $1.16 could improve the technical outlook. The US two-year Treasury yield advantage over Germany remains elevated near 162 basis points, the highest since early September. Following the ECB’s decision to hold rates steady and President Lagarde’s comments emphasizing a high threshold for further cuts, the market is less reactive to today’s October preliminary CPI data. The headline CPI rose 0.2% sequentially, causing the year-on-year rate to dip from 2.2% to 2.1% due to base effects. Core inflation remained steady at 2.4%.

Chinese Yuan (CNY)

The offshore yuan depreciated roughly 0.25% against the dollar yesterday—its largest single-day loss for the month—approaching CNH7.1180, a level maintained today. The midpoint of this year’s trading range is approximately CNH7.1210, with resistance anticipated near CNH7.1280 to CNH7.1300. Foreign exchange policy was notably absent from the recent US-China trade negotiations. The PBOC set the dollar fixing at CNY7.0880, marking two consecutive daily increases for the first time this month. October’s manufacturing PMI fell to 49.0 from 49.8, staying below the crucial 50 expansion-contraction threshold since April. Non-manufacturing PMI remained marginally positive but subdued, edging up to 50.1 from 50.0. The composite PMI declined to 50.0, its lowest level since the end of 2022.

Japanese Yen (JPY)

US interest rates’ upward adjustment, despite the Fed’s recent rate cut, combined with the Bank of Japan’s (BOJ) apparent reluctance to tighten policy yesterday, exerted downward pressure on the yen. The dollar advanced from near JPY152.85 at last week’s close to almost JPY154.45 yesterday, near the lower bound of a resistance band extending to JPY155. Today’s trading range between roughly JPY153.65 and JPY154.40 suggests bullish consolidation. The annual low for the dollar against the yen was set in April just under JPY140, with the high reached in January at nearly JPY159. Upcoming Japanese data—including September’s core Tokyo CPI, which rose from 2.5% to 2.8%—may influence the BOJ’s next action. Other key September data showed a stable unemployment rate at 2.6%, 0.3% growth in retail sales following an August decline, and a 2.2% rise in industrial output. Market-implied odds for a December BOJ rate hike currently stand near 46%, slightly down from last week, though some analysts suggest the chances have increased.

British Pound (GBP)

Sterling experienced a challenging week amidst a light economic calendar, dropping to a six-month low near $1.3115 yesterday. It has since stabilized, recovering slightly above the $1.3140 support level seen earlier this year. However, the technical outlook remains weak as the pound trades below its 200-day moving average near $1.3245 for the first time since April. It has been unable to rise above approximately $1.3165 today, and a weekly close below $1.3140 would increase its vulnerability. Attention shifts to the upcoming Bank of England (BOE) meeting, with swap markets pricing in roughly a 25% chance of a rate cut, increased from under 10% at the end of September. Among economists surveyed by Bloomberg, two of sixteen forecast a cut.

Canadian Dollar (CAD)

Following the Bank of Canada’s rate cut on Wednesday, the US dollar retreated against the Canadian dollar, reaching a more than one-month low slightly below CAD1.3890. The subsequent dollar strength after the Fed’s hawkish cut lifted it back above CAD1.3950, and yesterday’s follow-through pushed it near CAD1.4015—equivalent to a 61.8% retracement of the decline from a six-month high near CAD1.4080 hit on October 14. Today’s trading has been subdued but remains in the upper section of yesterday’s range around CAD1.3980 to CAD1.4010. Upcoming Canadian GDP data for August is anticipated to show stagnation following 0.2% growth in July. The monthly GDP has not expanded in two consecutive months since late 2024. The Bank of Canada’s fourth rate cut this year came amid official commentary reinforcing a high bar for further reductions.

Australian Dollar (AUD)

The Australian dollar rallied from approximately $0.6445 on October 17 to near $0.6615 before the Fed’s rate cut on October 29. It subsequently declined to nearly $0.6530 yesterday, corresponding to a 50% retracement of the recent rally. Despite holding at this low, the AUD has struggled to advance beyond $0.6560. Breaching $0.6530 could prompt further losses toward $0.6500. Wednesday’s elevated CPI reading is widely interpreted as virtually eliminating the chance of an RBA rate cut next week. Today’s Q3 Producer Price Index rose 1.0% (vs. 0.7% in Q2) and the year-over-year rate edged up slightly to 3.5%.

Mexican Peso (MXN)

The dollar broke above a narrow consolidation range, briefly surpassing MXN18.60 yesterday—the highest level in over two and a half weeks. October 10’s monthly high near MXN18.64 and October 14’s slightly lower peak near MXN18.63 serve as recent resistance points. The MXN maintains a level above MXN18.50 today, a threshold not consistently maintained since early September. The reported 0.3% contraction in Q3 GDP reinforces market expectations that Banxico will cut interest rates next week from 7.50% to 7.25%. This would represent the central bank’s seventh rate cut this year, bringing the cumulative reduction to 275 basis points, including a 125 basis point cut in 2024.

Brazilian Real (BRL) and Argentine Peso (ARS)

Brazil’s central bank will meet next week with expectations to maintain the Selic rate at 15.00%, a level unchanged since June. The US dollar rebounded from BRL5.3345 on Wednesday, approaching the weekly high and 20-day moving average near BRL5.3950 yesterday. Resistance lies between BRL5.4050 and BRL5.4300. Meanwhile, the US dollar has depreciated around 3.5% against the Argentine peso following stronger-than-expected election results for Milei’s party. The yield on the 10-year Argentine dollar bond has declined by nearly 25 basis points this week. Although the US Treasury has claimed success in recent negotiations, considerable uncertainty persists among market participants.