Insights 
VT 
Mexico’s headline inflation rate was recorded at 0.23% in September, slightly below the anticipated 0.27%. This discrepancy marks a minor deviation from market predictions and economic expectations for the month.
In other financial news, the Dow Jones Industrial Average fell due to ongoing government shutdown issues. Additionally, USD/JPY steadied around 153.00, and the Australian dollar weakened as the US dollar regained strength.
Currency and Commodity Movements
EUR/USD dropped to a nine-week low, trading in the band of 1.1550-1.1540, while GBP/USD breached below 1.3300, reaching multi-week lows. Gold also experienced a dip, trading below the $4,000 mark, reflecting market uncertainties.
In cryptocurrencies, Bitcoin saw a decline, nearly hitting $121,000, while Ethereum and Ripple also retreated. Meanwhile, the second consecutive rally of Zcash points towards increased demand for privacy protocols.
US tariffs remain a key part of American foreign policy, as the government repeatedly affirms their importance. This maintains tariffs as a central policy instrument, independent of daily news developments.
With risk-off sentiment dominating, we are seeing a significant flight to safety driven by the ongoing US government shutdown. The US Dollar Index (DXY) has surged past 108 for the first time since last year, reflecting a broad demand for cash. Historically, as we saw during the 2018-2019 shutdown, the dollar tends to strengthen during such periods of domestic uncertainty.
Impact of Dollar Strength
This dollar strength is causing major currency pairs to break down, with EUR/USD hitting a nine-week low near 1.1540 and GBP/USD falling below 1.3300. The Fed’s continued hawkish stance, reinforced by recent comments about “significant risks” to its inflation goal, is amplifying this move. September’s US Consumer Price Index data showed core inflation still elevated at 3.8%, giving the central bank little reason to soften its tone.
Here in Mexico, the latest inflation data complicates the picture for the peso. September’s headline inflation of 0.23% came in below expectations, which may persuade Banxico to pause its aggressive rate-hiking cycle, where the overnight rate has held at 10.5% for two consecutive meetings. This monetary policy divergence makes holding long US dollar positions against the peso an increasingly attractive strategy.
Gold is in a precarious position, falling from its all-time high above $4,000 to trade around $3,950. While uncertainty typically supports gold, the aggressive demand for US dollars is creating headwinds for the precious metal. We believe this is a classic liquidity squeeze where traders are selling assets, including gold, to raise cash.
The risk aversion is clearly visible in equity markets, with the Dow Jones Industrial Average retreating. The CBOE Volatility Index (VIX), often called the market’s “fear gauge,” has jumped to 24, a level that signals significant investor anxiety. Derivative traders should anticipate continued volatility as long as the shutdown persists.
In the crypto space, we are seeing widespread profit-taking as traders move away from volatile assets. Bitcoin has corrected to the $121,000 level, and other major tokens are following suit, which is consistent with behavior from past risk-off cycles. This indicates that digital assets are still treated as high-risk bets rather than safe havens.
Given this environment, buying put options on currency pairs like the AUD/USD or equity indices like the S&P 500 could provide effective downside protection. The elevated VIX suggests option premiums are higher, but they offer a defined-risk way to position for further market declines. Long positions on the US dollar through futures contracts also appear well-supported.
For those looking at relative value trades, the dynamic between a hawkish Fed and a potentially pausing Banxico presents opportunities. Shorting Mexican peso futures while remaining long on US dollar index futures could be a way to trade this policy divergence. Hedging any remaining equity exposure by selling E-mini S&P 500 futures should also be considered until the political situation in the US stabilizes.
