Foreign Exchange Market Overview

Market Sentiment and Currency Movements

The forex market remains subdued, with the US dollar showing modest weakness against most G10 currencies, while the Australian and Canadian dollars face headwinds. Meanwhile, the majority of emerging market currencies are exhibiting relative strength. Market optimism appears linked to the potential easing of US-China trade tensions, especially following Beijing’s decision to replace Li Chenggang, a figure previously criticized by the US Treasury Secretary.

China’s third-quarter GDP growth aligned broadly with forecasts, registering a 1.1% quarterly increase, accompanied by the first contraction in non-property investment since the onset of the COVID-19 pandemic.

Government Bonds and Equity Markets

Benchmark 10-year government bond yields have generally increased. Notably, France saw a ratings downgrade by S&P before the weekend, pushing its 10-year yield higher by 2 to 3 basis points today. Other eurozone yields, including Italy’s—despite its recent upgrade—rose by about half as much. The 10-year US Treasury yield firmed to around 4.01%, maintaining a trough close to this level.

Equities are advancing: a new political alliance in Japan sets the stage for LDP’s Takaichi to become the next prime minister. The Nikkei surged nearly 3.4%, and shares of mainland Chinese companies trading in Hong Kong increased by approximately 2.45%. Indices in Taiwan and South Korea experienced gains between 1.4% and 1.7%. European stocks, represented by the Stoxx 600, rebounded by roughly 0.65%, reversing previous losses. US equity futures extended pre-weekend gains, while gold markets stabilized, recovering about 0.25% to near $1,426 per ounce after suffering nearly a 1.75% decline earlier. December WTI crude oil remained largely unchanged, fluctuating within a $0.40 band around $57 per barrel.

Currency Specific Analysis

US Dollar

The Dollar Index recovered from a dip near 98.00 before the weekend to 98.55 and edged slightly above 98.65 in early trading. The 50% retracement level of last week’s losses is positioned around 98.75.

President Trump has articulated three main demands in ongoing China trade discussions ahead of the threatened escalation of tariffs post-November 10. These demands include ceasing China’s leverage on rare earth elements, increasing purchases of US soybeans, and halting fentanyl exports.

The absence of government economic releases amid the Federal Reserve’s communications blackout ahead of next week’s FOMC meeting has increased market dependence on Fed funds futures, which currently imply confidence in at least one rate cut before year-end. Tomorrow’s Philadelphia Fed non-manufacturing survey will be closely watched, following a robust jump in the manufacturing survey from -8.7 to 10.7.

The focal point for the week will be the September Consumer Price Index (CPI), an important indicator for social security cost-of-living adjustments. The headline inflation rate is expected to rise to 3.1% year-over-year from 2.9%, while the core rate is forecasted to remain steady at 3.1%. The last time the headline CPI declined on a year-over-year basis was in April.

Euro

The euro retreated from just under $1.1725, its peak in over a week, as US equities stabilized and several regional bank earnings were well received. It is currently trading within a narrow range just below $1.1675, remaining marginally above last Friday’s lows. Initial support is likely in the $1.1630-40 zone.

The euro area reported an €11.9 billion current account surplus in August—the smallest since April 2023 and considerably less than the €23.3 billion recorded in August 2024. Year-to-date, the surplus is just under €200 billion, down from nearly €295 billion in the same period last year.

While the direction of the current account balance offers limited insight into this year’s euro appreciation, the European Central Bank projects the surplus to narrow to 2.4% of GDP this year from 2.7% in 2024, stabilizing around 2.5% in 2026 and 2027.

Chinese Yuan (CNY)

Ahead of the weekend, the US dollar fluctuated within Thursday’s range against the offshore yuan, settling comfortably inside it. The CNH traded between roughly 7.1225 and 7.1290 today. The People’s Bank of China (PBOC) has lowered the dollar reference rate over the past three sessions, reaching a yearly low at 7.0949 on Friday and 7.0973 today.

Today marks the commencement of the Fourth Plenary Session of the Chinese Communist Party, during which the five-year plan and key personnel changes will be announced. This meeting occurs amid reports of a purge of senior military officials and heightened US-China trade tensions.

In a gesture likely intended to mollify American critics, China replaced Li Chenggang, the international trade envoy previously labeled “unhinged” by Treasury Secretary Bessent. This reshuffle may set the stage for a potential meeting between President Xi and President Trump at the upcoming APEC summit scheduled for October 31 to November 1.

Economically, China posted a 1.1% quarter-over-quarter GDP increase in Q3, equating to 4.8% year-over-year expansion. However, macroeconomic indicators remain soft: retail sales growth slowed sequentially, industrial output growth moderated to 5.2% in August (from 6.5%), and residential property prices continued their gradual decline. Notably, property investment and residential sales contracted, with fixed asset investment falling 0.5%—the first decline since the pandemic.

Japanese Yen (JPY)

The US dollar briefly declined to a nine-day low near ¥149.40 prior to the weekend before rallying toward session highs near ¥150.60, supported by rising US interest rates. The formation of a bullish hammer candlestick pattern was registered, followed by a peak around ¥151.20 earlier today. However, renewed selling pressure pulled the dollar down to just above ¥150.30 during the European session.

Japan’s Liberal Democratic Party (LDP) forged an alliance with the Innovation Party (Ishin), virtually guaranteeing that Sanae Takaichi will become Japan’s first female prime minister. Ishin’s agenda includes a temporary suspension of the sales tax on food, stricter political funding regulations, and reducing the size of the Diet.

British Pound (GBP)

Sterling experienced an “outside day” candlestick pattern before the weekend but closed little changed, neutralizing the technical implication. Price action hints at modestly constructive momentum, provided the $1.3380 support zone holds. Sterling stalled near $1.3470 late last week, encountering resistance around $1.3485-90—levels that correspond to the 50% retracement of the post-Fed cut sell-off since September 17.

Currently, sterling sustains a tight trading range slightly above $1.3400. With a light economic calendar today, market attention shifts to tomorrow’s government budget balance—a key release for gilt markets. The midweek release of the September CPI and later retail sales and flash PMI readings will also be significant.

Market pricing implies roughly a 12% probability of a rate cut in the upcoming Bank of England meeting, rising to about 40% by year-end. The current policy rate target stands at 4%, with swaps markets pricing an implied rate near 3.5% for mid-2024—the lowest since early August.

Canadian Dollar (CAD)

The US dollar posted an outside down day against the Canadian dollar prior to the weekend, dipping below CAD1.4020 for the first time in four sessions. It marginally breached CAD1.40 briefly today, where options expiring today total almost CAD720 million. While the technical signals appear favorable for the Canadian dollar, a decisive break below CAD1.3960 would be required to confirm a reversal.

The Bank of Canada’s Q3 business survey is scheduled for release today, though it is typically met with limited market reaction, particularly with tomorrow’s CPI report looming. The central bank seems to lean slightly toward a rate cut despite a solid jobs report earlier this month, downplaying core inflation’s persistence in signaling policy moves.

Australian Dollar (AUD)

The Australian dollar successfully tested last week’s low near $0.6640 ahead of the weekend—the lowest since August 22—before rebounding to above $0.6500 late last Friday and reaching $0.6515 earlier today. Options totaling approximately AUD 340 million at the $0.6500 strike expire today. To bolster its technical outlook, AUD must decisively surpass resistance near $0.6535.

Though the Australian dollar briefly traded below October 10’s low ($0.6475) on three consecutive sessions, it consistently closed above this level last week. Australia’s economic calendar is sparse until the preliminary PMI release later this week. Recent weaker employment data and ongoing US-China trade tensions continue to weigh on AUD sentiment.

Futures imply just over a 50% probability of a rate cut next month, an increase from below 33% at September’s close, though down from a 70% peak following recent labor market data.

Mexican Peso (MXN)

The US dollar strengthened to a three-day high above MXN18.55 ahead of the weekend amid risk-off sentiment but reversed course as US equities stabilized, with the dollar slipping toward MXN18.3650. Today, it made a marginal new low near MXN18.3620, close to last week’s low of MXN18.3565 recorded on October 16.

The peso’s near-term path will likely be influenced primarily by broad US dollar trends and shifts in risk appetite. Key domestic data releases are concentrated midweek, including Wednesday’s IGAE surveys and Thursday’s retail sales and CPI figures covering the first half of October.

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_This overview synthesizes recent market developments and economic data flows shaping the foreign exchange markets across major and emerging economies._