Dollar Gains as Yen and Euro Falter

CURRENCY FUTURES

US DOLLAR: The USD index is higher as it continues its two-day advance, supported by a weaker euro and yen. Political uncertainty in France and Japan’s newly elected prime minister drove fiscal worries and led the dollar to advance strongly against the currencies. Focus in the US will shift to the Fed’s September meeting minutes out on Wednesday. Investors will scrutinize opinions regarding the risks to employment and inflation and any signals on how interest rates will move at the Fed’s meeting later this month and in December. Delayed data could be released later in the week if the government agrees to a stopgap funding plan.

EURO: The euro is lower against the dollar as the resignation of France’s prime minister on Monday continued to pressure the currency.  The news deepens France’s political crisis and places pressure on President Macron, as markets gauge whether or not the president will call for snap parliamentary elections, which could increase short-term uncertainty and see the euro fall further. France is now unlikely to pass its 2026 budget, meaning lawmakers will need to pass emergency funding legislation to authorize government spending until a full budget is approved. On the data front, German manufacturing orders fell 0.8% in August, below expectations of a 1.2% increase in orders. The figure was dragged lower by a weak automotive sector and declining demand from overseas, leading to a drop in orders for the second consecutive month. Looking ahead, German industrial production figures out Wednesday, and Italian industrial production figures out Friday will be the mainstay of economic data. Top policymakers at the European Central Bank, including President Christine Lagarde, said on Monday that the current level of interest rates was appropriate but that they may need to reduce borrowing costs slightly if the risk of inflation going too low increases.

BRITISH POUND: The pound fell in quiet trade as market attention largely remains on the euro and yen. It is a quiet week for the British economic calendar, with Thursday’s RICS house price survey for September being the only notable data release. Bank of England chief economist Huw Pill is scheduled to speak Wednesday, while Catherine Mann is set to speak on Thursday. Both Pill and Mann voted with the majority to keep interest rates unchanged at the last BoE meeting in September. Markets are pricing in a 10% chance of a rate cut at the BoE’s November meeting as the central bank continues to battle persistently high inflation.

JAPANESE YEN: The yen hit a two-month low as political developments continue to drive price direction following the election of Sanae Takaichi by the ruling Liberal Democratic Party. Takaichi embraces looser fiscal policy and debt-fueled fiscal stimulus, which has raised concerns from investors in Japan over the country’s debt sustainability and consequently weighed on the yen due to her strategy’s implied inflationary effects. Bond markets in Japan have spiked in reaction to her election, with Japan’s 30-year jumping to nearly 3.3% this morning, the highest yield on record. Japan’s public debt is twice the size of its GDP, and with inflation rising and the Bank of Japan trying to raise interest rates, investors are demanding a higher term premium for JGBs. On the interest rate front, the election of Takaichi presents an injection of uncertainty. Money markets are pricing in just a 25% chance that the central bank will raise rates at its October meeting, down from nearly 60% before the election. A parliamentary vote is scheduled for mid-October to confirm Takaichi as Japan’s next prime minister.

AUSTRALIAN DOLLAR: The Australian dollar fell, pressured by a stronger dollar and a disappointing Westpac-Melbourne Institute Consumer Sentiment Index, which fell by 3.5% month-over-month in October, marking the steepest contraction since April. The drop in sentiment underscores rising household concerns over persistent inflation. Elsewhere, ANZ-Indeed Australian Job Ads dropped 3.3% in September, the third consecutive decline. On the inflation front, the Melbourne Institute’s monthly inflation gauge showed a 0.4% increase in September, up from a 0.3% drop in August. The uptick in inflation, although not an official reading, added to market sentiment that official Q3 inflation could prove hotter than expected, something that the Reserve Bank of Australia had noted last week as it left rates on hold. Speculation of a November rate cut from the RBA continues to fall as markets now imply around a 40% chance of a quarter-point rate cut in November. Markets will look to comments from RBA officials this week for clues on the policy path in November.

STOCK INDEX FUTURES

The indexes are little changed following record highs recorded for the Nasdaq and S&P 500 as markets await any signs of progress on the shutdown in Washington. President Trump on Monday said he would negotiate with Democrats over health care subsidies, which have been at the root of the shutdown. However, President Trump later said Democrats would need to vote to reopen the government before negotiations take place.

The multibillion-dollar deal between AMD and OpenAI yesterday added to the AI/tech rally and resulted in many strategists raising their targets for the S&P 500, even ahead of upcoming earnings from several large tech companies. Highlighting the economic calendar will be the Fed’s meeting minutes from its September meeting out tomorrow and the University of Michigan consumer sentiment surveys out on Friday. Trade data for August is out on Tuesday, and weekly jobless claims figures will be delayed if the shutdown continues. If Washington resolves the shutdown, September’s nonfarm payroll figures and other delayed reports could be released during the week, which would likely add a stir of volatility to markets.

INTEREST RATE MARKET FUTURES

Futures are little changed across the curve following a quiet day of trading on Monday. Markets in the US will prepare for a $58 billion three-year note auction today, as well as appearances from Fed members Bostic (nonvoter, hawk), Bowman (dove), Miran (dove), and Kashkari (nonvoter, centrist). Wednesday’s meeting minutes and this week’s Treasury auctions will likely serve as the main market movers along with any political developments, either domestically or abroad. Bond markets were weighed down yesterday by a sell-off in Japanese Government Bonds following the election of Sanae Takaichi, who favors government debt-funded expansion.

Investors will scrutinize the Fed’s meeting minutes out Wednesday for any signals about whether more interest rate cuts could come in October and December. Markets are currently pricing a 92.5% chance of a 25 bps cut in October and a 79.7% chance of a following cut in December. Any insights on policy moves and views on the double-sided risks to employment and inflation will be watched closely. Elsewhere on the supply front will be a $39 billion 10-year note auction on Wednesday and a $22 billion 30-year bond auction on Thursday.

The spread between the two- and 10-year yields slipped to 55.70 bps from 56.10 bps on Monday, while the 2-year yield, which reflects interest rate expectations, edged up to 3.601%.

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