FX Market Briefing: 'Shutdown' - Oct 2nd

USD: After quarter-end dynamics and current policy shifts, corporate FX risk managers should remain alert to the factors influencing the USD. The dollar is leading FX markets as risk assets diminish. U.S. Core PCE is on a decline, albeit at a slowing rate, while Chicago PMIs have dropped following consecutive monthly gains. These trends align with the Federal Reserve's "higher for longer" policy, a stance complicated by recent consumer sentiment data and a Q2 GDP revision to 5.2% from 4.5%, indicating stronger savings. The Dollar Index remains closely correlated with U.S. Treasury yields; as yields rise, expect a stronger dollar. The ongoing U.S. government shutdown presents some risk, though there seems to be bipartisan progress underway at the time of writing. The shutdown's impact on the FX market could affect data releases, hamper economic momentum, and potentially stall the USD's rise. Economic data will be important with the effects of the UAW strike become more clear and the lag in rate policy impact is further assessed.

Monitoring treasury yields and its global rate spreads can be a supportive for signaling shifts in dollar sentiment. Participants will as well be reevaluating hedging strategies to contain abrupt USD movements, and if relevant, considering diversification strategies such using multi-currency liquidity pools for natural hedge determination or options-based hedging.

CAD: During last Friday's North American trading, the Loonie's advance against the USD stalled due to a flat Canadian GDP, which was impacted by strikes in B.C. that affected manufacturing and goods production. USDCAD's rise might be attributed to quarterly positioning, while rate concerns dampened the potential boost to risk appetite. Currently, oil prices are testing the $90-95/bbl range, and copper has rebounded to $370/lb, driven by speculation over Chinese demand and U.S. inventories have been softer than expected. Despite the rise in oil prices, a stronger CAD is not guaranteed, but it hasn't hurt it, as equity markets continue to wield more influence on risk-sensitive currencies. However, CAD and other commodity-based FX have held up against USD strength in September. Key economic releases this week include Friday's September employment report and PMIs from S&P on Monday and Ivey on Thursday. US/CA 2-year yield spreads will continue to be important, especially as the Bank of Canada aligns with the Fed on the possibility of another rate hike before year-end. Reserve Bank of Australia and New Zealand meet next week to start the week off, no policy change expected.

EUR: In Germany, the 24-month inflation low of 4.3% complicates the already fragmented financial landscape of the Eurozone. This could solidify the ECB's cautious posture, warranting preparations for potential Euro weakness, particularly if the ECB adopts a dovish stance. For now, EURUSD has found support at the 1.05 level; any deviation could be significant. Although ECB easing appears unlikely, unexpected policy guidance or shifts could sway EURUSD, which is expected to lack direction until Friday’s U.S. non-farm payrolls are released. Monitoring PMI data will provide insights into price pressures. It will be important to keep an eye on EU politics as the regions grapple with a potential fragmented recession and ongoing tensions stemming from the Ukraine conflict, which are causing rifts within its coalition governments. CEE FX (PLN, CZK, and HUF) have lost quite of bit of their strength as central banks are rather in the late stages of their own 'higher for longer' policy.

GBP: In the UK, declining construction orders serve as a warning signal. Monitoring PMIs will be used to assess Sterling's resilience against macroeconomic challenges and a robust USD. Portfolio rebalancing poses a risk, potentially making GBPUSD susceptible around the 1.20/1.21 levels. FX risk managers should regularly review their hedging strategies given these variable, taking into account yield differentials and conducting stress tests for both US Dollar strengthening and downside risks in Sterling. Vulnerability is highlighted due to the Bank of England's potential for further rate hikes being a particular decision to make, fueled by the UK's wage- and energy-led inflation. The central bank must weigh the risks of hiking rates into a recession or letting inflation progress further, while currently weaker global risk appetite provides little support for GBP.

JPY: USDJPY is approaching its yearly high of 150, fueled by rising U.S. yields. While Japanese authorities have made vocal warnings about potential market interventions, no concrete actions have been taken thus far. Any significant moves from the Bank of Japan, or shifts in JGB yields, could impact carry trades and require alterations in FX budgeting strategies. Though the Federal Reserve's "higher for longer" stance could establish levels above 150 for USDJPY as the new norm, despite verbal cautions from the Bank of Japan and participants' interest in the real yield aspect of JPY. BoJ summary of opinions will be monitored for guidance on “quiet policy exit”

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