Global Market and Currency Overview: Trade Developments and Central Bank Actions

Trade Agreement Between the US and China

The United States has agreed not to impose restrictions on subsidiaries of Chinese firms subject to sanctions, nor enforce port fees on Chinese vessels—actions that had previously contributed to China’s tightening of rare earth and magnet export controls. In response, China has committed to suspending these export restrictions for one year and has also lifted its port call levies on US-operated ships. Beijing will resume purchases of US soybeans, with some reports indicating additional energy purchases may be included. Notably, Nvidia’s Blackwell chip was not discussed during the negotiations. Despite US advancements in technology, establishing domestic rare earth processing and magnet manufacturing infrastructure will require more than a year to develop.

This agreement is likely to face criticism from hawkish factions within the US foreign policy establishment.

Federal Reserve Rate Cut and Market Reaction

Yesterday, the Federal Reserve implemented its second quarter-point rate reduction of the year, as widely anticipated (with 96% of economists and 98% of futures pricing expecting it). Additionally, the Fed signaled it would conclude its balance sheet runoff in November, replacing maturing mortgage-backed securities with Treasury bills. There were two dissenters: one favoring a 50 basis points cut, as expected, and another advocating for unchanged policy, likely due to inflation concerns.

Chair Powell adopted a less dovish tone than markets anticipated, emphasizing that a December rate cut is not guaranteed. This stance strengthened the US Dollar Index, which reached a new two-week high near 99.35 during Powell’s press conference, consolidating between 98.90 and 99.20 today. Resistance levels are identified near the monthly highs of 99.45-99.55, with the nearest extension potentially reaching 100.00-100.25.

The US government shutdown continues to affect key economic data releases. Notably, starting November 1, Supplemental Nutrition Assistance Program (SNAP) benefits will halt for approximately 40 million Americans, including 40% children, 18% elderly, and 11% disabled individuals. The Atlanta Fed’s GDP tracker reported Q3 growth accelerating to 3.9%, exceeding Bloomberg survey medians of 2.7% and 3.0%.

Currency Movements and Central Bank Updates

Euro (EUR)

The euro traded within a narrow range of roughly $1.1615-$1.1670 this week before weakening to around $1.1575 following the Fed’s announcement. It has since stabilized just above $1.1595. The European Central Bank (ECB) meeting results are expected shortly, with minimal chance of policy changes. Comments from ECB President Lagarde, however, could influence the exchange rate. Eurozone GDP grew by 0.2% in Q3, following 0.1% in Q2. Unemployment held steady at 6.3%. Germany and Italy experienced stagnant growth, while France surprised with 0.5% expansion. Preliminary data indicate that October CPI might ease slightly in Germany to a 2.2%-2.3% year-over-year rate from 2.4%. Spain’s CPI was firmer than expected at 3.2% (EU harmonized).

Chinese Yuan (CNY)

The US dollar has found support just below CNH7.09, with the year’s low near CNH7.0850 set on September 17. The dollar briefly surpassed CNH7.10 during the Fed’s announcement and extended gains to a three-day high slightly above CNH7.11. Resistance is observed around CNH7.1250-CNH7.1300. The People’s Bank of China (PBOC) raised the reference rate slightly today following consecutive record low fixes. Presidents Trump and Xi secured another trade truce, suspending port levies and rare earth export restrictions for a year. China will resume soy purchases and possibly increase energy imports. October PMI data expected tomorrow are forecasted to remain steady.

Japanese Yen (JPY)

The dollar retested an eight-month high near JPY153.25 earlier this week and has since climbed to nearly JPY154 following the Bank of Japan’s decision to maintain its 0.50% target rate with two dissenting votes favoring a hike. Most economists (94%) and the swaps market (87%) expected this outcome. The BOJ slightly raised growth projections to 0.7% for the year. Governor Ueda indicated the potential for future rate increases if economic conditions permit. Key economic indicators for September, including unemployment, industrial production, and retail sales, will be released shortly. October CPI data will be scrutinized for inflation trends.

British Pound (GBP)

Sterling has underperformed, depreciating nearly 4.3% since the Fed’s rate cut on September 17, losing more than half of that in the last nine sessions. The currency found support around $1.3140—corresponding to the 38.2% retracement level of this year’s rally from the July peak near $1.3800. Sterling is consolidating near $1.3200, with further downside risks targeting the $1.2950-$1.3000 zone. Despite a light economic calendar, the market has marginally increased the probability of a Bank of England rate cut next week to approximately 27%.

Canadian Dollar (CAD)

The Canadian dollar continued its recovery despite the Bank of Canada’s recent quarter-point rate cut. The US dollar weakened below CAD1.3890, reaching its lowest level since September 25, relinquishing roughly half of its gains since last month’s Fed easing. The dollar briefly rebounded post-FOMC to session highs near CAD1.3955 but has since consolidated in a narrow range. The overnight lending rate now stands at 2.25%, with little prospect of further near-term tightening. August GDP data expected tomorrow are forecasted to show zero growth after a 0.2% increase in July.

Australian Dollar (AUD)

The Australian dollar’s four-day advance paused yesterday, influenced primarily by the Fed Chair’s remarks. The gains achieved the 61.8% retracement of losses since the September 17 high. The five-day moving average has recently crossed above the 20-day average for the first time since September, signaling potential short-term momentum. The AUD peaked near $0.6620 before pulling back to $0.6555 following Powell’s comments. It is trading within a tight range slightly below $0.6600 today. The market substantially lowered expectations for an RBA rate cut next week, currently pricing around a 10% chance, down from 55% last week.

Mexican Peso (MXN) and Brazilian Real (BRL)

The US dollar remained range-bound against the Mexican peso near MXN18.34–MXN18.46 until the FOMC meeting, after which it briefly rallied to MXN18.50 and settled near MXN18.4850, the highest close in two weeks. It is consolidating between MXN18.45 and MXN18.50 today. Mexican Q3 GDP data to be released today are forecasted to show a 0.4% quarterly contraction and a 0.3% annual decline—the first negative annual reading since Q1 2021—potentially increasing speculation of an interest rate cut from the current 7.50%.

Against the Brazilian real, the US dollar fell for the third consecutive session, reaching lows near BRL5.3350 before rising to settle around BRL5.36 after the Fed announcement.

Fixed Income and Commodities

US Treasury yields rose following the FOMC decision, with benchmark 10-year yields slightly softer at approximately 4.06%. European 10-year benchmark yields increased by 2-4 basis points. Equities largely traded lower, except in Japan and South Korea, where trade agreements, including provisions for nuclear-powered submarines, have boosted markets. Europe’s Stoxx 600 declined for the third consecutive day, matching one of its longest downturns in recent months. US futures point to softer openings.

Gold remained firm, testing the $2,000 per ounce level during European morning trade. December WTI crude oil traded steadily around $60 per barrel within a narrow range.

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_This summary provides an economist’s perspective on recent global trade developments, central bank decisions, currency market movements, and economic data releases._