Market Overview

The markets initially hoped that President Trump and Treasury Secretary Bessent’s assessments were accurate — that China had overreacted by broadening and tightening export licensing controls on critical materials, and that tensions would soon ease. However, this optimism appears misplaced as risk aversion has intensified, leading to sharp declines in equities and a rally in government bonds. The US dollar has generally strengthened amid the turmoil.

Currency and Commodity Performance

Dollar-bloc currencies, notably the Australian dollar and Scandinavian currencies, have weakened. The Norwegian krone has borne the brunt of the recent oil price decline, with November WTI crude dropping over 2% to a four-month low near $58 per barrel. Most emerging market currencies are also softer, led by a 0.65% retreat in the Mexican peso.

In Europe, all eyes are on France’s Prime Minister Lecornu, who is scheduled to present the national budget to the National Assembly around 9:00 am ET. The euro may react to the reception of this budget.

Global Equity Markets

Despite a US equity rally yesterday, Asia-Pacific markets sold off sharply today. The Nikkei declined nearly 2.6%, the Hang Seng shed 1.7%, while China’s CSI 300 dropped 1.2%. Australia was the sole major market to post gains amid regional weakness. European equities, as measured by the Stoxx 600, are relinquishing yesterday’s 0.4% gain. US futures markets reflect the risk-off sentiment, with the S&P 500 futures down about 0.8% and Nasdaq futures off over 1%.

Fixed Income and Precious Metals

Benchmark 10-year government bond yields in Europe have fallen by approximately 3-4 basis points, with the UK 10-year Gilt yield declining more sharply by over six basis points following a rise in UK unemployment figures. The US 10-year Treasury yield dipped nearly three basis points, hovering near 4%—a level it has only closed below once this year (in April). Gold surged to a new record high close to $4180 per ounce, while silver initially rose near $53.55 before retreating.

Detailed Currency Analysis

US Dollar (USD)

The Dollar Index continues to respect last Thursday’s trading range (~98.70-99.55). The inside days recorded on Friday and Monday suggest a continuation rather than a reversal pattern. While daily momentum indicators are stretched, there remains scope for a move higher, with the August 1 peak near 100.25 providing a key resistance marker.

With the ongoing US government shutdown, the economic calendar is slim. Today features the NFIB small business optimism index, while tomorrow will bring the Empire State Manufacturing Survey. The US has also commenced tariff collection on imported timber, lumber, kitchen cabinets, vanities, and upholstered furniture, with levies of 25% on certain products and 10% on softwood timber and lumber, as part of a previously announced January increase. According to the National Association of Home Builders, about 7% of goods used in new residential construction are imported, highlighting potential impacts. Tariff exemptions apply, such as a 10% tariff on wooden furniture imports from the UK and 15% from Japan and the EU.

Euro (EUR)

The euro is under pressure, testing lows just above $1.1540 from last Thursday, with potential support between $1.1515 and $1.1520. Downside risk extends toward the August 1 low just below $1.1400. The euro’s struggles are attributed to geopolitical tensions involving the US, China, Russia’s war on Ukraine, and hybrid conflict dynamics affecting Europe.

Recent economic data have added to the euro’s vulnerability. Germany’s October ZEW economic sentiment survey showed the current conditions component declined for a third consecutive month to -80.0, the weakest since May. Expectations improved modestly to 39.3 from 37.3, though they remain well below the May 2022 peak of 52.7. Political uncertainty persists in France; President Macron’s government remains fragile with Prime Minister Lecornu’s survival of an impending confidence vote uncertain. Later today, Lecornu will present the budget draft to the National Assembly.

Chinese Yuan (CNY)

The offshore yuan continues to trade within last week’s range (~CNH7.1240-CNH7.15). The People’s Bank of China (PBOC) set the dollar reference rate at approximately CNY7.1007 yesterday, the lowest since last November, with today’s fix at CNY7.1021. Despite US claims that China erred in broadening export controls on critical minerals, recent developments suggest the US may reconsider implementing 100% tariffs previously threatened. Vice President Vance indicated yesterday that the tariffs might be avoidable. Moreover, President Trump, who earlier dismissed meeting President Xi at APEC, now appears open to such engagement.

China has managed to substitute US demand and goods—including soy, beef, and energy—more easily than the US can replace China’s supply of processed rare earth elements. China’s exports to the US have dropped by over 25%, while overall exports have increased by 8.3%. Considering the importance of processed rare earths for semiconductors and AI, China currently holds escalation dominance. Additionally, tariffs on port calls began today, targeting five US entities, including Hanwha Ocean. Domestic data releases include September CPI and PPI figures, due tomorrow morning, with expectations for continued deflationary pressures.

Japanese Yen (JPY)

The dollar’s downside reversal against the yen witnessed before the weekend was short-lived. The greenback closed last week near JPY151.20, opened yesterday around JPY151.65 (also the day’s low), and rose to almost JPY152.45, retracing approximately 61.8% of last Friday’s sharp drop. Today, the dollar has traded within last Friday’s range (~JPY151.15-JPY153.25), making the closing price important for technical Outlook.

Japan’s political landscape remains unsettled following the collapse of the long-standing coalition between the Liberal Democratic Party (LDP) and Komeito over political funding issues. Komeito is threatening to withhold support for Takaichi’s prime ministerial bid and will not actively promote LDP candidates. Opposition parties appear fragmented, lessening prospects of a united front. While Takaichi is likely to become prime minister, legislative passage may become more challenging.

British Pound (GBP)

Sterling relinquished approximately half of its pre-weekend gains, trading near $1.3315. A key retracement level (61.8%) is close at $1.3300. Weaker jobs data today pushed the pound below $1.3255, its lowest point since August 1. Support levels are identified in the $1.3180-$1.3200 range.

UK labor data revealed steady average weekly earnings growth accelerating to 5.0% year-over-year (three-month rolling), excluding bonuses, which declined slightly to 4.7%. The ILO unemployment rate edged up to 4.8%, the highest since Q1 2021. Employment growth decelerated to 91,000 in the three months through August from 232,000 previously, marking the slowest pace since April. Jobless claims rose by 25,800 in September after a revised 2,000 decrease in August. Swaps markets have increased the probability of a Bank of England rate cut this year from about 28% to nearly 39%.

Canadian Dollar (CAD)

The US dollar has consistently traded above CAD1.40 for three consecutive sessions, pushing slightly above CAD1.4065 today to reach a six-month peak. Initial resistance lies near CAD1.4080, with potential to extend toward CAD1.4150-65. Though daily momentum indicators suggest overextension, no reversal signals have emerged.

Risk-off sentiment following recent US equity declines may weigh on the Canadian dollar. Stronger-than-expected September employment data released last week had limited impact. While both Canadian and US banks were closed yesterday, the Canadian dollar underperformed within the dollar bloc, ending near the middle of the G10 currency pack. Market pricing has reduced the probability of a Bank of Canada rate cut this year to about 40% from nearly 58% before the employment release, with minimal effect on the currency.

Australian Dollar (AUD)

The Australian dollar declined from approximately $0.6610 last Thursday to just below $0.6475 by the weekend. Yesterday, it staged a partial recovery, surpassing the (38.2%) retracement level of the two-day drop near $0.6525, peaking just under $0.6535. Most of the North American session saw it oscillate between $0.6505 and $0.6525. Renewed clarity on escalating US-China tensions has driven the AUD down to $0.6450 today, a low last seen on August 22. Support is anticipated between $0.6415 and $0.6430.

Minutes from the recent Reserve Bank of Australia meeting had limited influence on futures pricing. The probability of a rate cut next month has eased to approximately 43% from over 50% yesterday and about 43% before the weekend. Upcoming September employment figures due Thursday may influence the currency’s direction.

Mexican Peso (MXN)

The risk-off environment that pushed the dollar to nearly MXN18.64 before the weekend eased yesterday with a strong US equity rally, allowing the dollar to retreat to about MXN18.43—approximately a 61.8% retracement from last Thursday’s low near MXN18.30. However, risk aversion has returned today, driving the dollar back close to MXN18.60 during European trading. Initial resistance above last Friday’s high stands near MXN18.66.

Most major Latin American currencies rose yesterday, led by a 5.3% surge in the Argentine peso, amid speculation that US assistance diminishes risks ahead of the parliamentary elections on October 26. The Brazilian real rose over 1% after falling 2.8% pre-weekend. The US dollar reached a two-month high above BRL5.52 before the weekend but retreated to nearly BRL5.45 yesterday.

Disclaimer

This summary is intended for informational purposes and should not be construed as financial advice or a recommendation for specific investments.