Insights 
VT 
The US Dollar Index surged to 98.85 following optimism around a potential trade deal between the US and China. President Trump announced a meeting with Chinese Prime Minister Xi Jinping, expressing hopes for a “fair deal” to ease trade tensions. Concurrently, the US government’s shutdown, in its fourth week, is anticipated to conclude soon according to White House economic advisor Kevin Hassett, further aiding the dollar’s rise.
Market Sentiment and USD Index
The USD Index, reflecting the USD against six major currencies, benefits from an improved market sentiment. The possibility of concluding the US-China trade conflict, which began in 2018 over tariffs and trade barriers, is bolstering confidence. This conflict resurfaced with Donald Trump’s return to office, prompting proposed 60% tariffs on China and renewed concerns about global economic disruptions akin to those seen prior to the pandemic.
Statistics Canada is poised to release September inflation data, offering the Bank of Canada insight for its next interest rate decision. The BoC is expected to lower rates by 25 basis points. Meanwhile, PancakeSwap’s CAKE faces pressure as holders cash in on profits, reflected by a drop below $2.90 while large stakeholders reduce their positions.
Given the US Dollar Index’s push towards 98.85, we are seeing a classic relief rally based on hopes for a US-China trade deal. However, these gains are built on rhetoric, not on a signed agreement, following the aggressive 60% tariffs imposed back in January of this year. We should therefore consider this dollar strength fragile ahead of next week’s meeting between the two presidents.
The market’s fear gauge, the VIX index, has dipped below 20 for the first time in a month, down from highs near 30 when tariff impacts were being priced in. This decline in implied volatility makes buying protection cheaper. It could be a prudent time to purchase put options on equity indices as a hedge in case the upcoming trade talks sour unexpectedly.
We remember how the previous trade war, which escalated through 2018 and 2019, was estimated by the IMF to have trimmed global GDP by 0.8%. The current tariffs are substantially higher, suggesting the market may be underestimating the downside risk if a deal is not reached. The current optimism feels disconnected from the potential economic drag we have seen in supply chain data over the past nine months.
Government Shutdown and Economic Data
The ongoing government shutdown adds another layer of uncertainty, depriving us and the Federal Reserve of key economic data. This situation is reminiscent of the 35-day shutdown we navigated in late 2018, which delayed crucial reports and made forecasting Fed policy exceptionally difficult. Without fresh employment or inflation figures, any Fed statements next week will be based on incomplete information.
Meanwhile, today’s Canadian inflation data presents a direct trading opportunity. The market is pricing in a 25 basis point rate cut by the Bank of Canada on October 29, but Statistics Canada just reported September’s annual inflation rate came in at a surprisingly firm 3.1%. This stickiness in inflation could force the central bank to hold rates steady, which would likely strengthen the Canadian dollar.
This creates a compelling case for trades that would benefit from a hawkish surprise from the Bank of Canada, such as buying call options on the Canadian dollar or selling the USD/CAD currency pair. The divergence between a data-blind Fed and a Canadian central bank facing persistent inflation could define currency movements in the coming weeks.
