Market Overview: US Dollar and Global Currency Movements

US Dollar Holds Firm as Pullback Reverses

The US dollar has strengthened today, recouping much of last week’s declines. Despite the US 10-year Treasury yield spending increased time below the 4.0% threshold, the Japanese yen is the weakest among G10 currencies, depreciating roughly 0.70%. This follows Japan’s historic appointment of Takaichi as its first female prime minister, raising investor concerns about the policy direction she may pursue. Meanwhile, Japanese Government Bonds (JGBs) remained largely unchanged. Most emerging market (EM) currencies have softened, while the Chinese yuan has traded mostly flat, positioning it at the top of the EM foreign exchange complex ahead of Latin American market openings.

Commodities and Equities Performance

Gold surged nearly 2.5% yesterday, hitting a fresh record near $4381.50, yet has retreated nearly 2% intraday and is maintaining levels above yesterday’s low of approximately $4219. December West Texas Intermediate (WTI) crude oil is consolidating after recovering from just below $56 to exceed $57, reaching nearly $57.30 today.

In equities, Asia-Pacific markets extended gains following the rally on Wall Street. China’s CSI 300 led advances, up about 1.5%. The Stoxx 600 index held steady after a 1% rally yesterday, while US futures indicated mild softness. European 10-year yields edged slightly lower, with the US 10-year Treasury yield dropping about one basis point to around 3.97%. Notable benchmark lows include last week’s trough near 3.93% and the annual low around 3.85% recorded near “Liberation Day.”

Currency Highlights

US Dollar Index near Key Retracement Level

After falling over 0.5% last week, the Dollar Index is in a consolidation phase approaching the 61.8% Fibonacci retracement of last week’s losses, trading near 98.90 in the European session. The prior week’s high was just below 99.50. National Economic Council director Hassett expressed optimism that the US government shutdown will likely conclude this week, although market skepticism remains. Key data due today includes the Philadelphia Fed’s October non-manufacturing survey, which had a September reading at -12.3, continuing a contraction trend seen through 2024. The factory survey in October revealed a sharp decline in business sentiment from 23.2 in September to -12.8, the weakest since April.

Attention for the week centers on Friday’s Consumer Price Index (CPI) report. The Bloomberg consensus forecasts a 0.4% rise in headline inflation and 0.3% in the core measure, with the annual headline rate projected to increase for the fifth month in a row to 3.1%, up from 2.9% last month and 2.4% in September 2024. Core inflation is expected to remain steady at 3.1%. This pattern underscores why Federal Reserve discussions emphasize core inflation, as headline rates tend to converge toward core figures rather than vice versa. Derivative pricing suggests the market expects an interest rate cut next week and an additional reduction before year-end.

Euro Shows Slight Weakness After Rally

The euro rebounded from just under $1.1545 to nearly $1.1730 last week but closed near session lows heading into the weekend and extended losses slightly yesterday, trading around $1.1640. Prices have fallen marginally past the 61.8% retracement level near $1.1615, which aligns with the descending trendline extending from the September 17 multi-year high (~$1.1920) and early October highs (~$1.1780 and $1.1760). Options expiring today for roughly €960 million at $1.1600 add significance to this support. A break below could prompt a return to last week’s lows. The eurozone economic calendar is light until the preliminary October Purchasing Managers’ Index (PMI) late in the week, expected to remain relatively unchanged.

Chinese Yuan in Consolidation

The US dollar has entered a consolidative phase against the yuan, dipping slightly below CNH7.1170 before last weekend and reaching almost CNH7.1160 today, before rebounding to approximately CNH7.1220. The People’s Bank of China (PBOC) increased the daily reference rate to CNY7.0973 yesterday from CNY7.0948 prior to the weekend—the first increase in four sessions—although the fix was lowered today to CNY7.0930, marking a new yearly low. The reference has remained above CNY7.09 since mid-October 2024. Last week, the World Bank upgraded its forecast for China’s growth this year to 4.8% from 4.0%, a view echoed by several banks.

Japanese Yen Under Pressure Amid Political Changes

The dollar reached eight-month highs near JPY153.25 on October 9-10, dipped below JPY149.40 before the weekend, then rebounded toward JPY150.65. Yesterday saw bids pushing USD/JPY to about JPY151.20, stalling near the 50% retracement of the recent pullback (~JPY151.35), before surpassing it today and rising slightly above JPY151.80, challenging the 61.8% retracement. Options totaling approximately $465 million struck at JPY152 expire today. Last week’s peak was close to JPY152.60.

The new LDP-Ishin political alliance in Japan fell two seats short of a Diet majority, but Takaichi became Prime Minister earlier today. Key policy debates remain unresolved, including Ishin’s proposal for a temporary food sales tax cut and stricter political funding regulations. A discussion forum has been established with a target to reach decisions by the end of Takaichi’s LDP leadership term in September 2027. The coalition agrees on national security issues, reducing lower chamber seats by 10%, and social welfare reforms for employees. Ishin, headquartered in Osaka, also cut local government seats from 109 to 79. Both parties support the restoration of nuclear power.

British Pound Faces Downside Pressure

Sterling held steady over the past three trading sessions but is weakening today. The currency had recovered from a multi-month low near $1.3250 last Tuesday to gains of $1.3455 last Thursday and $1.3470 before the weekend, before easing back to close just above $1.3425. Yesterday’s range was tight around $1.3400-$1.345, but the pound dipped to a four-day low near $1.3370 today. Key retracement levels are the 50% retracement of last week’s rally at $1.3360 and the 61.8% at roughly $1.3335.

Earlier today, UK public finance data showed the September budget deficit increased to GBP 20.2 billion from GBP 18.26 billion in September 2024 and GBP 14.62 billion in September 2023. The year-to-date deviation versus Office for Budget Responsibility (OBR) forecasts narrowed to about GBP 7.2 billion, down from GBP 11.4 billion in August. September’s CPI is due tomorrow, and a modest 0.1% monthly increase could push annual inflation to 4.0%, up from 3.8% in August. Core inflation is anticipated to creep up to 3.7%, with service prices edging to 4.8%. The Bank of England’s policy meeting next week faces market expectations pricing less than a 13% chance of a rate cut immediately and approximately 40% odds before year-end.

Canadian Dollar Consolidates Ahead of CPI

The US dollar hit six-month highs near CAD1.4080 last Tuesday but has since consolidated. It dipped to a five-day low yesterday but held support just above CAD1.4000. Technical momentum indicators are elevated but have not turned decisively downward. A break above last week’s highs could pave the way for a move past CAD1.4100, with risk noted toward the CAD1.4150-65 area. Canada reports September CPI today, with expectations for a second consecutive 0.1% monthly decline. Despite this, the year-over-year rate is projected to rise to 2.2% from 1.9%, its highest since Q1’s end. Underlying core inflation measures are expected to remain steady near 3.0%; however, Bank of Canada officials have indicated that true underlying inflation may be closer to 2.5%. The inflation report is unlikely to deter the central bank from cuts next week, as markets price an 85% probability of a rate reduction, a significant increase from last Monday’s 40%, following strong employment data.

Australian Dollar Reverses Gains after Initial Recovery

The Australian dollar extended gains initiated before the weekend, rising from just below $0.6450 on Friday to around $0.6515 yesterday. This morning, it climbed to $0.6525 but failed to clear last week’s high near $0.6535, subsequently reversing lower to threaten yesterday’s low near $0.6475, a level corresponding to the 61.8% retracement of last week’s rally. Expirations today include approximately A$335 million in options at $0.6530 and nearly A$500 million at $0.6500, potentially adding selling pressure.

Political developments include Australian Prime Minister Albanese’s meeting with former US President Trump, where enhanced cooperation on rare earth elements captured investor interest. Trump also endorsed the AUKUS submarine agreement. Australia’s economic calendar is light until the preliminary October PMI is released later this week.

Emerging Market Currencies and Regional Developments

Mexican Peso Marginally Lower amid Domestic Challenges

The dollar slipped to a new seven-day low near MXN18.3525 yesterday but rebounded slightly within a consolidative range. It is trading above yesterday’s high near MXN18.42. Last week’s peak was around MXN18.63, with the monthly high slightly above at approximately MXN18.6370. Flooding in Mexico presents new obstacles for President Sheinbaum, compounded by cutbacks to the disaster fund made by her predecessor. Mexico’s economic calendar heats up starting tomorrow with the August IGAE monthly economic activity report, considered a proxy for monthly GDP. The data has shown alternating monthly rises and falls this year; July marked the largest decline, down 0.89%. Year-to-date through July, the index averages 0.05% growth, below the 0.14% recorded in the first seven months of 2024. August retail sales and inflation data for early October will be released Thursday.

Regional Tensions and Bond Market Movements

Heightened tensions between the US and Colombia pressured the Mexican peso, which declined around 0.90%, ending a three-day rally following a 2.3% gain last week. Concurrently, the 10-year US dollar bond yield on Colombia’s issuance rose nearly two basis points to about 6.80%. Longer-term yields in Mexico and Brazil softened modestly. The dollar rose against the Argentine peso to a new high near ARS 1477.39 yesterday, despite the 10-year dollar yield declining following the Argentine government’s announcement of a bond buyback program after the FX market closed.

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_Disclaimer: This analysis is provided for informational purposes and does not constitute investment advice._