Insights 
VT 
Japan’s monetary base year-on-year declined to -7.8% in October from -6.2% previously. This indicates an ongoing reduction in the overall money supply within the economy.
The finance ministry announced China will remove some tariffs on US agricultural products from 10th November. Meanwhile, the price of gold increased as the US government shutdown approaches its longest duration in history.
USD Exchange Rate Trends
The USD/INR exchange rate remains above 88.50 amid reduced trading activity due to an Indian bank holiday. USD/CAD has reached a seven-month high, trading over 1.4100, influenced by declining crude oil prices.
WTI crude oil continues to fall, nearing $60.00 per barrel amid increasing US inventories. China’s Premier Li mentioned that protectionist measures have had a severe impact on the global economic order.
In the cryptocurrency market, ZKsync and Internet Computer maintain their value while Bitcoin drops below $100,000, leading to $2 billion in total liquidations. Decentralised finance platforms face scrutiny following a $120 million hack on Balancer, a veteran decentralised exchange.
Editorial picks include EUR/USD maintaining gains and GBP/USD experiencing lows, whilst gold rebounds after a recent decline. The week ahead may test risk sentiment with implications for the Dollar, the Aussie, and the Pound.
Monetary Policy and Political Impact
The shrinking monetary base in Japan is the primary signal for us right now. We see the Bank of Japan accelerating its balance sheet reduction to -7.8%, a significant move away from decades of loose policy. This fundamental tightening is a strong tailwind for the Japanese Yen.
At the same time, the US is facing a government shutdown that is nearing the longest in its history. Looking back, we remember the 35-day shutdown in 2018-2019 was estimated by the Congressional Budget Office to have reduced GDP by $11 billion. This political gridlock creates a clear headwind for the US dollar and raises questions about economic stability.
This sharp contrast between a tightening Japan and a paralyzed US government makes shorting the USD/JPY pair a compelling strategy. We expect this fundamental divergence to drive the pair lower in the coming weeks. Buying put options on USD/JPY could be an effective way to position for this expected downside.
The yen’s strength is likely to be broad, especially against currencies with their own domestic troubles. The British Pound, for example, is already in a steep decline, having fallen for most of the past twelve sessions. This makes short positions on pairs like GBP/JPY look particularly attractive.
While China lifting some agricultural tariffs is good for general sentiment, it’s a minor factor compared to the major central bank and political shifts. The mix of a US shutdown and a hawkish BOJ is a recipe for high volatility in currency markets. We believe strategies that profit from increased market chop, such as long straddles, could perform well.
The backdrop of gold trading near $3,950 an ounce shows that deep-seated inflation fears have not gone away. This makes the Bank of Japan’s commitment to tightening its policy even more significant. It signals a serious global effort to maintain price stability, even at the cost of short-term growth.
