Market Overview

FX Market: US Dollar Softness and G10 Movements

The US dollar is generally weaker against both G10 and emerging market currencies. The Reserve Bank of Australia’s hawkish stance contributed to the Australian dollar gaining nearly 0.5%, reaching a four-day high above $0.6700. Despite weak industrial production and retail sales data, the Japanese yen also strengthened by a similar margin.

US Fiscal and Trade Developments

A US federal government shutdown appears nearly unavoidable at this stage. Additionally, the United States announced new tariffs: a 10% duty on softwood timber and lumber, and a 25% tax on kitchen cabinets, vanities, and upholstered wood products. These tariffs will phase in from as early as October 14, with some effective from January 1. Canada is the primary target, already subject to a 35.2% duty aimed at countering purported subsidies and unfair pricing.

Equity Markets and Fixed Income

Asian-Pacific equities posted gains overall, although South Korea, Australia, and select index markets experienced declines. Europe’s Stoxx 600 traded with a modest loss, while US index futures were down between 0.15% and 0.25%. Notably, around 33% of the S&P 500 constituents are currently in blackout periods ahead of earnings releases, a figure expected to increase to approximately 80%-85% by mid-October.

Benchmark 10-year bond yields exhibited mixed movements across Europe, while the 10-year US Treasury yield declined slightly, dipping below 4.13%.

Commodities

Gold retreated after reaching an all-time high near $1,871, sliding below the $1,800 level. November West Texas Intermediate (WTI) crude extended a sharp 3.5% decline recorded yesterday, dropping another 1% to $62.45, having closed last week slightly above $65.70.

Currencies in Detail

US Dollar Index and Economic Indicators

The US Dollar Index extended its pullback, falling below 97.80 to nearly 97.65, coinciding with the 20-day moving average and the 38.2% Fibonacci retracement of the rally since the Federal Reserve’s September 17 rate cut. The next key retracement level (50%) lies near 97.40.

Important US data releases this week include house prices, JOLTS job openings, and the Conference Board’s consumer confidence survey. However, the potential government shutdown looming at midnight may diminish their market impact. FHFA house prices likely contracted for the fourth consecutive month in July, while the S&P CoreLogic Case-Shiller index showed the slowest increase in two years. Consumer confidence is expected to have slightly declined. Despite labor market softening, elevated household debt stresses, and weakened consumer sentiment, consumption remains resilient. Q2 GDP revisions showed consumption growth revised up to 2.5% annualized from 1.6%, with personal consumption expenditures increasing more than income in the three months through August.

Euro Area: Inflation and Consumption Data

The euro, following gains yesterday, reached the 38.2% retracement of losses sustained since the September 17 Federal Open Market Committee (FOMC) meeting near $1.1750, edging to a new high around $1.1760 today. The 50% retracement level sits slightly above $1.1780.

Focus remains on September inflation data and August consumption figures from Germany and France. German states reported CPI figures ahead of national data, which is forecast to show a 0.1% monthly increase, maintaining a 2.2% year-over-year rate. France’s EU-harmonized CPI rose 1.1% year-over-year, up from 0.8% in August. Italy’s CPI ticked up to 1.8% from 1.6%.

Retail sales in Germany unexpectedly declined by 0.2% in August following a 0.5% drop in July, contrasting with median survey expectations of a 0.6% increase. French consumer spending edged up 0.1%, recovering slightly after a 0.6% decline in July.

Swaps markets price a very low probability of another European Central Bank rate cut: around 10% for Q4 2025 and 34% in the first half of 2026.

Chinese Yuan (CNY)

The US dollar’s retracement yesterday reversed nearly half of its post-FOMC gains relative to the Chinese yuan, with the intra-session low around CNH7.1185, very near last week’s low of about CNH7.1115. The pair consolidates quietly between CNH7.1250 and CNH7.1330.

The People’s Bank of China set the reference rate at CNY7.1055, compared with CNY7.1089 on the previous day. China’s extended holiday begins tomorrow, with markets resuming on October 9. The next significant event is the plenary session scheduled for October 20–23, which will set the direction for the 2026-2030 five-year plan.

Recent September PMI readings show manufacturing and services activity remained largely stable. Official manufacturing PMI edged up slightly to 49.8 from 49.4, just below the contraction threshold; services PMI was steady at 50.0. The composite PMI rose marginally to 50.6. The Caixin PMI (now published by RatingDog) presented a stronger outlook, with composites at 52.5. The reaction of the yuan and Chinese equities was muted.

In Q3, China’s CSI 300 index recorded an impressive 17.9% advance, ranking among the top global performers. The index of mainland Chinese companies traded in Hong Kong rose approximately 10.1%.

Japanese Yen (JPY)

The dollar reached a low just below JPY148.50 during early European trading, falling further to about JPY147.80 in North American hours. The current levels approach the 50% retracement of the dollar’s rally post-Fed rate cut near JPY147.75, with the 61.8% retracement around JPY147.20.

Yen appreciation has continued despite disappointing Japanese economic data. Industrial production dropped 1.2% in August, marking the fourth decline in five months, with the largest two-month contraction since early 2024. Retail sales also disappointed, falling 1.1% in August after a 1.6% decline in July—reflecting the weakest two-month performance since the pandemic.

Swap markets have marginally raised the probability of a Bank of Japan rate hike before year-end to slightly above 80%. The Tankan Survey, due tomorrow, is forecast to be stable. Politically, the Liberal Democratic Party leadership election will likely require a run-off between reformist Koizumi and conservative Takaichi, who could become Japan’s first female prime minister if victorious.

British Pound (GBP)

Sterling recently climbed above $1.3455, reaching the 61.8% retracement of last week’s losses but failing to surpass the previous Thursday’s high near $1.3465, or the 38.2% retracement of declines since September 17 near $1.3480. Today’s peak in early European trading was slightly below yesterday’s high, with initial support forming around $1.3400–$1.3420.

The UK’s revised Q2 GDP confirmed a 0.3% quarter-over-quarter expansion. Government spending partially offset stagnant consumer demand and a widening current account deficit. Business investment’s drag was revised less severely than initially reported, from -4.0% to -1.1%. Bloomberg’s median forecast anticipates 0.2% quarterly growth for Q3 and Q4. Swap markets reflect expectations that the Bank of England will maintain rates until Q1 2026, when a 74% probability of a rate cut is priced in.

Canadian Dollar (CAD)

From the September 17 FOMC meeting through last Friday, the US dollar rallied about 1.7% against the Canadian dollar, peaking near CAD1.3960—the strongest level in four months. Yesterday’s retracement extended close to CAD1.3900. The currency has since stabilized slightly above this level but is capped near CAD1.3925, with support near CAD1.3885–CAD1.3900. A break below CAD1.3870 could signal a high is in place.

Year-to-date, the Canadian dollar has declined roughly 1.33%, underperforming most G10 currencies except the New Zealand dollar, which is down approximately 1.8%. The CAD typically lags in weaker US dollar environments. Swap markets assign around 80% probability to an additional Bank of Canada rate cut this year, with the October 29 meeting considered roughly a coin toss. Markets price a near 90% chance of a Federal Reserve cut.

Australian Dollar (AUD)

The Australian dollar fell near $0.6520 before the weekend but then recovered slightly above $0.6540, approaching $0.6580 yesterday. It has climbed further to almost $0.6615 today, reaching the 50% retracement level of last week’s decline from the September 17 high slightly above $0.6705.

Australia recorded a 0.6% rise in private sector credit in August. Robust consumption underpinned the Reserve Bank of Australia’s decision to keep the cash rate steady at 3.60%. Governor Bullock reiterated caution, noting that inflation is decelerating more slowly than anticipated. Futures had priced around a 70% chance of a Q4 rate cut before the meeting but reduced the probability post-decision to about 50%. Swap markets now imply a terminal cash rate near 3.25%.

Mexican Peso (MXN)

The US dollar briefly dropped below MXN18.30 yesterday—to its weakest level since the post-Fed cut reaction—before stabilizing and closing within the pre-weekend range. The greenback is trading quietly between MXN18.3280 and MXN18.3835.

Latin American currencies have ranked among the best performing emerging market currencies this month, with the South African rand and Hungarian forint also notable high-yielders. The Turkish lira, however, declined approximately 1% against the dollar.

Argentina’s peso ended a five-day rally following a modest uptick in the unemployment rate to 2.93% from 2.77%. Mexico’s calendar is light today, featuring only the August budget report. The government projects a small primary budget surplus (excluding debt servicing). After last week’s rate cut to 7.50%, swap markets anticipate further easing with one cut priced for Q4 and another in Q1 2026. The terminal rate is speculated to be in the 6.50%-7.00% range, somewhat below current market expectations.