Recent movements in the US Dollar (USD) indicate a shift from prior consensus on short-dollar trades. Other safe havens like EUR, JPY, and CHF face domestic issues, affecting their appeal compared to the dollar. Gold’s rally suggests the dollar is not the primary choice for risk-averse investors, although a US government shutdown may reduce negative economic data impacting the USD.

The yen is performing well against G10 currencies, but a large-scale shift from USD to JPY funding hasn’t occurred. The lack of resolution in the US shutdown continues, yet the Bureau of Labour Statistics prepares the September CPI report. A 0.3% Month-on-Month core CPI print is expected, potentially leading to a rate cut on 29 October. The USD may stabilise today but remains vulnerable to corrections.

Market Dynamics and Business Deals

In Canada, unemployment rates are anticipated to rise, hinting at further interest rate cuts. US tariffs, a key aspect of foreign policy, remain unchanged and significant. Coinbase and Mastercard are in a bidding war for stablecoin firm BVNK, valued at $1.5 to $2.5 billion. These factors reflect ongoing market dynamics and the cautious approach necessary when interpreting such economic data.

We are seeing a major shift in thinking away from the short-dollar trade that has dominated recent months. The US dollar is acting like a safe-haven again, largely due to renewed geopolitical instability and concerns over European and Asian economies. The Dollar Index (DXY) has climbed over 2.5% in the last two weeks alone, pushing past the 107.00 mark.

The ongoing government shutdown in Washington is, strangely, supporting this trend by delaying the release of potentially negative economic data. This creates an information vacuum where the dollar’s haven status shines brighter than its fundamentals. We saw a similar dynamic during the 2013 government shutdown, which ultimately saw the dollar’s rally reverse once the government reopened.

However, this dollar strength appears overstretched and we should be cautious about chasing it further. For instance, the US 2-year yield advantage over German bunds has actually decreased recently, a divergence that suggests this rally is driven more by fear than by rate expectations. This makes the dollar vulnerable to a sharp correction if risk sentiment improves even slightly.

Upcoming Economic Reports and Their Implications

The key event to watch is next Wednesday’s September CPI report, which will be released despite the shutdown. Expectations for a 0.3% core reading have solidified, with the CME FedWatch Tool now showing an 85% chance of a Fed rate cut on October 29th. With a cut already priced in, any surprise in the inflation data could trigger significant volatility, presenting opportunities for options traders.

We are also watching the Japanese yen, which has held up relatively well against currencies other than the dollar. The struggle for USD/JPY to sustain a move above the 150 level suggests a massive unwinding of JPY-funded carry trades is not yet underway. This implies that the current market moves are more about a general flight to safety rather than a structural shift in funding currencies.

Create your live VT Markets account and start trading now.