The US Dollar’s recent rally is showing signs of levelling off with limited movement among major G10 currencies. The Bank of Canada is in focus as the CNH is outperforming with a 0.3% gain following the return from China’s Golden Week. The CAD, AUD, CHF, and MXN are stable against the USD, while the EUR and GBP are seeing small declines.

There’s a modest underperformance from the NZD, NOK, and SEK. Wednesday’s FOMC minutes indicated mixed signals, considering both market concerns and the prospect of further rate cuts. Equity futures are well supported, setting fresh record highs, and the US 10Y yield is consolidating above 4.10%.

Commodity Market Overview

Oil prices are steady post-OPEC gains, with copper rising nearly 2%. Gold remains at record highs above $4000/oz, although the rally appears overbought. The ongoing US government shutdown hampers the release of key economic data, including jobless claims. Remarks from Fed Chair Powell and appearances from other Fed officials are part of Thursday’s Fedspeak calendar.

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The US Dollar’s rally seems to be running out of steam, and we are now seeing it consolidate its recent gains. With the Federal Reserve signaling more rate cuts are likely this year, derivative traders should be cautious about being overly long the dollar. Fed funds futures are currently pricing in an 85% probability of a 25-basis-point cut at the December FOMC meeting, which could limit further dollar upside.

With stock markets pushing to new record highs, we are seeing signs of complacency, as the VIX volatility index is trading near 12, a low not seen since before the inflation spike of 2022-2023. This suggests that options-based protection, such as buying puts on major indices like the S&P 500, is relatively cheap right now. A period of low volatility like this has historically preceded sharp market corrections, making it a good time to consider hedging strategies.

Gold Market Analysis

Gold’s rally to over $4,000 an ounce is significant, but the Relative Strength Index (RSI) at 86 indicates it is in highly overbought territory. We saw a similar RSI reading back in the second quarter of 2024, which was followed by a 5% pullback in gold over the next three weeks. Traders might consider buying put options or establishing bear put spreads to position for a potential short-term price correction.

As the US government shutdown enters its third week, the lack of key economic data like jobless claims is creating an information vacuum for the market. This makes the upcoming speeches from Fed officials, especially Chair Powell, even more important for short-term market direction. Any unexpected hawkish or dovish tilt could cause a spike in volatility across currency and interest rate derivatives.

We see that oil prices are holding steady after the recent OPEC-driven gains, and the return of Chinese markets after their holiday has boosted industrial metals like copper. The strength in copper, up nearly 2%, signals underlying optimism about global manufacturing demand. This could provide support for commodity-linked currencies like the Australian and Canadian dollars if the US Dollar continues to stall.

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