Insights 
VT 
Government Shutdown and Inflation Report
In the US, bipartisan efforts failed to reopen the government with the funding bill falling short in the Senate with a 54-45 vote. Meanwhile, US Bureau of Labor Statistics began recalling some staff to finalise the September Consumer Price Index report, although the release’s timeline remained uncertain.
In Canada, the unemployment rate was projected to rise to 7.2% in September from August’s 7.1%. Early Friday, USD/CAD stabilised around 1.4000 after reaching heights above 1.4030.
Concerns in Japan hindered the Yen from recovering with USD/JPY maintaining around 153.00. Gold experienced a sharp drop, as easing tensions in the Middle East influenced a 1.6% decline, leaving XAU/USD to fluctuate above $3,980.
Volatility and Currency Strategies
The US Dollar rally is taking a break, and we should be cautious in the next couple of weeks. The ongoing government shutdown talks in Washington create significant uncertainty, especially with the potential delay of the September inflation report. This environment suggests that using options to trade volatility, such as straddles on the Dollar index, could be more prudent than picking a firm direction.
For the USD/JPY pair, which has surged past 153.00, the weakness in the Yen seems driven by Japan’s own political instability. While this trend could continue, we must remember the Bank of Japan intervened around these levels back in late 2022 to support its currency. Therefore, buying call options might be a better way to capture further upside while clearly defining the risk of a sudden reversal.
All eyes are on the University of Michigan Consumer Sentiment data later today, with forecasts expecting a small dip to 67.5 from last month’s 68.1. Similarly, the Canadian unemployment report is expected to show a rise to 7.2%, which could push the USD/CAD pair higher if the data confirms a cooling labor market. These near-term events are perfect for short-dated options strategies to trade the immediate reaction.
Gold has pulled back below $4,000 as Middle East tensions seem to ease for now. However, if the US government shutdown extends past next week, we could see a flight to safety that benefits the precious metal. We saw in the 2018-2019 shutdown that gold gained over 4% during the standoff, making call options on gold a potentially cheap hedge against rising political risk in the US.
Across the board, pairs like EUR/USD below 1.1600 and AUD/USD above 0.6560 are in holding patterns, waiting for a clear signal from the US. The key takeaway for the coming weeks is that expected volatility is likely higher than what is currently priced in. We should position ourselves for a significant market move once there is clarity on US inflation data and the government funding situation.
