Foreign Exchange Commentary

Summary

• The DXY sold off for most of the week, to as low as 98.03 before pairing losses, trading at 98.49.
• The U.S. Government shutdown continues to affect economic data with the CPI delayed till October 24^th.
• U.S.- China tensions have remerged over rare-earth export controls and retaliatory tariffs.
• The ECB remains unchanged in policy expectations as the Euro gained against the U.S. dollar.
• LDP Leader Sanae Takaichi is attempting to form a coalition in her bid for Japanese Prime Minister.
• There is an 80% chance of a rate cut for the Reserve Bank of Australia after the Jobs miss.

Dollar Eases as Data Gaps persist
After trading as high as 99.5 last week, the dollar index (DXY) sold off for 3-continious sessions sitting near 10-day lows into Thursdays close before climbing back Friday morning to 98.49. Currently, markets are pricing in an October rate cut with 100% certainty as traders continue to grapple with limited official economic data amidst the government shutdown. The move was most visible against the euro and Japanese yen thanks to dovish Fed signaling, the U.S. data blackout, and tariff discussions.

With the federal shutdown preventing official economic dataflow, inflation remains a key question as private market data is relatively scarce for this measurement. The Bureau of Labor Statistics has postponed the release of September's Consumer Price Index to Friday, October 24 in accordance with statutory cost of living adjustment requirements but noted that other data releases will be delayed pending funding.

Fed Chair Jerome Powell signaled the central bank is nearing the end of its balance sheet runoff, noting liquidity conditions are “tightening” and reserves are “ample”. He suggested additional rate cuts are likely as a softer labor market brings inflation and employment risks into closer balance. Fed Governors Waller and Miran also had dovish comments this week, advocating for an October rate cut and more aggressive cutting in general, respectively.

U.S.–China trade tensions have flared again this week, with China accusing the U.S. of stoking global panic over new rare-earth export controls. In response, the Trump Administration threatened 100% tariffs on Beijing. Despite Chinese officials defending the measures as national-security safeguards, markets widely view this move as retaliation against Washington’s expanded chip and tariff actions. Regardless, President Xi and Trump still plan to meet at the APEC summit in Seoul, despite earlier reports suggesting that a meeting between the two world leaders might be canceled amid the renewed dispute.

Separately, new U.S. tariffs on wood products, furniture, and cabinets kicked in this week ranging between 10-25%. Goldman Sachs estimates that U.S. consumers will absorb roughly 55% of tariff costs by the end of 2025, rising to around 70% next year as businesses gradually pass higher import costs downstream. In the near term, it appears that U.S. businesses are shouldering a larger portion of the costs, though the White House maintains that the burden will ultimately fall on foreign exporters.

Euro Firms on USD sell-off; ECB Signals Unchanged
EUR/USD was higher week-to-date, trading around the 1.16–1.17 range as the USD weakened. New French Prime Minister Sébastien Lecornu formed a government and survived two no-confidence votes on Thursday after previously stepping down which added positive momentum to the euro. ECB communication remains in “steady hand” mode with not much support for any changes in fiscal policy. Friday’s CPI data for the Eurozone was largely in line with expectations, with YoY inflation coming in at 2.2%. However, core-inflation was higher than the consensus estimates of 2.3% coming in at 2.4%.

The September ECB meeting described current rates as “sufficiently robust” to manage two-sided risks, implying a high bar for additional easing. ECB President Christine Lagarde’s recent remarks to Parliament in Paris reiterated the medium-term 2% anchor unless new shocks emerge.

Yen edges Lower vs Week Highs
USD/JPY hovered around 150.2–150.4 into Thursday, off earlier highs, tracking the broader USD pullback. In Japanese Central Bank news, deputy Governor Shinichi Uchida reiterated that the BoJ would raise rates if the outlook of continued inflation remains as projected. For now, a hike during the October BOJ meeting appears unlikely with investors focused on political developments amidst the Liberal Democrat Parties (LDP) attempts to hold a prime minister vote on October 21^st.

Political coverage continues to focus on Sanae Takaichi’s election as the new LDP leader. Takaichi, is focused on forming a coalition between the LDP and the Japanese Innovation Party (JIP) as she attempts to become Japan’s first female Prime Minister.  Her priorities appear to be focusing on revitalizing growth, at the cost of looser fiscal policy. Takaichi has indicated she supported a weaker yen which could strain Japanese Debt funding which continues to rise – yields on the Japanese 30-year note have risen 35% since the beginning of the year making it harder for the government to finance operations.

Aussie dollar Drops on Jobs Miss
Australia’s September labor report showed unemployment at 4.5%, the highest since 2021. In response, AUD/USD retreated to the mid-0.64s as markets priced in the probability of a November RBA cut to 80%. Minutes released Oct 14 from September’s meeting reaffirmed a 3.60% overnight rate and a data-dependent stance with Governor Michele Bullock quoted saying that policy is “marginally tight.”