Insights 
VT 
The US Dollar is showing mixed performance, with the DXY index displaying marginal firmness as gains are centred around core major currencies. High beta and commodity currencies are generally performing better, supported by a 5% increase in crude oil prices and a mild rebound in gold, which helped mitigate earlier losses.
The Japanese Yen is underperforming due to high energy prices that negatively impact its terms of trade. Oil price increases were triggered by the announcement of US sanctions on Russia’s leading energy producers, with the EU also enforcing new sanctions on Russia’s energy sector. Global stock markets remain relatively stable, whereas bonds have sold off, particularly US Treasurys, driving the 10-year yield close to 4%.
Geopolitical Risks and Market Volatility
Geopolitical risks have increased market volatility, with potential US software export restrictions to China affecting tech stocks negatively. In contrast, discussions about the US acquiring equity in quantum computing firms for federal funding are seen as a positive development. The market awaits the US September CPI report, though a 25 basis point cut in the Federal Funds rate is already anticipated. The DXY might reach the mid-99 level shortly and could continue to rise into November before potential consolidation.
We see the US Dollar strengthening against major currencies like the euro and yen, with the Dollar Index (DXY) climbing to 98.80 this morning. This move is happening even as the market fully expects a 25 basis point rate cut from the Federal Reserve. We believe a retest of the mid-99 level is likely in the coming weeks.
New sanctions on Russia’s energy sector have pushed WTI crude oil prices over $100 a barrel, a 5% jump in a single day. This is creating a dynamic we last saw in 2022, suggesting commodity-linked currencies like the Australian and Canadian dollars will continue to outperform. Traders should therefore consider long positions in oil futures and these related currencies.
For Japan, which imports most of its energy, these high oil prices are a significant negative. The latest government data released last week showed Japan’s trade deficit for September widened by 15% from last year, confirming the strain. As a result, we see the USD/JPY pair pushing towards the 155 level, making it a compelling trade.
Geopolitical Tensions and Market Nervousness
Geopolitical tensions are clearly making markets nervous, especially with the talk of new US software export curbs on China. We have seen the VIX index, a key measure of stock market volatility, jump from a low of 14 to over 17.5 in the past week. For derivative traders, this is a clear signal to consider buying volatility, perhaps through options on major indices.
All attention now shifts to tomorrow’s US September CPI report, where analysts expect a 0.2% month-over-month increase. While the Fed’s rate cut is a done deal, any inflation number higher than expected could challenge the market’s view on future policy. This inflation data remains the biggest near-term risk to the current trend of dollar strength.
