Foreign Exchange Commentary

Summary

• The DXY has sold off after the U.S. government went into a shutdown this week.
• Third-party data continues to imply a cooling labor market keeping the October interest rate cut priced into expectations.
• The Canadian dollar hit a five-month low against the U.S. dollar due to worsening economic conditions.
• Despite sticky inflation, the Mexican peso continues to remain resilient against the U.S. dollar.
• The euro currency rally has tapered in recent weeks, trading at 1.1740 currently, after reaching as high as 1.1919 on September 17^th.

Dollar Sells Off Amidst Govt. Shutdown
After a strong GDP print last week, the DXY snapped a four-day losing streak as markets evaluated the effects of the U.S. government shutdown, a worsening labor market, and lack of ancillary inflation data. The shutdown has already delayed the weekly jobless claims numbers and the nonfarm payrolls report, making it harder for the Federal Reserve to interpret the state of the economy. Chicago Fed President Austan Goolsbee, when discussing the recent pickup in services inflation, mentioned the “problematic” nature of a lack of third-party inflation data, stating the Fed is “going into a period where you’re trying to figure it out: is this a transition? If you’re not going to get data, it’s just that much harder.” Given that non-tariff components of the market are beginning to see pressure and the CPI print is two weeks away, the horizon will remain foggy, with more emphasis expected to fall on third-party data sources until the government reopens.

The Challenger job cuts data, a private labor report in the market, reported that U.S. employers cut 54,064 jobs in September, which was the fewest number of cuts in the last three months and down 25% year-over-year. So far this year, the report claims U.S. employers have cut over 946,000 jobs – the highest YTD since 2020, with the government sector being the most affected, cutting 300,000 jobs alone. Public sector unemployment is expected to trend higher depending on the length of the shutdown with the Trump administration calling it an “unprecedented opportunity” to cut more federal jobs.

ADP Private Payrolls also reported the biggest slide since March 2023. While estimates called for 51,000 jobs to be added by private employers, the report said otherwise– with private companies shedding 32,000 jobs, and small businesses fueling most of those declines.

The cooling labor market story has left the October interest rate cut firmly priced into the market, though Federal Reserve Chairman Jerome Powell’s speech on Tuesday at the Greater Providence Chamber of Commerce indicated a more hawkish position for the Fed. Chair Powell described the Fed’s position as challenging because of the delicate balance between cutting rates too quickly and reigniting inflation, which is already elevated, or moving too slowly and risk further job losses.

Canadian Dollar Slumps
The Canadian dollar hit a five-month low against the U.S. dollar, trading as high as 1.3986, though still not crossing the 1.40 support level on Thursday as the Canadian economy continues to face mounting pressure. The Bank of Canada (BoC) remains defensive, dealing with similar issues as the U.S. Federal Reserve: Inflation is still above the BOC’s preferred levels, and growth is muted due to U.S. tariffs affecting the labor market and the economy. Additionally, Canada’s biggest export, oil, continues to be adversely affected by OPEC’s overproduction, which does not appear to be slowing down anytime soon.

Mexican Peso Remains Resilient
Though the growth outlook for the Mexican peso is weak, it remains structurally supported thanks to an attractive yield, a stable labor market and moderate inflation. The Mexican peso which enjoyed global investments as US companies moved towards “nearshoring” has seen some growth disappointment as trade uncertainty has reduced private investments and export demand. Despite these growth concerns, the liquidity of the currency and the credibility of Banxico in keeping inflation under control, are supporting the peso.

Despite operating in a rate-cutting cycle, the peso has maintained relative strength against the greenback and inflation appears to be ticking down coming in at 3.5% over the last two months versus 4.3% in June. Despite this, inflation risk remains elevated which has been the main point of contention during Banxico interest rate meetings.

If trade negotiations with the Trump administration move adversely, inflation ticks back up (core-inflation remains sticky at 4.2%), or the global growth sentiment further declines, moves to save-haven assets like the U.S. dollar could spell trouble for the peso. For now, it appears the Mexican Peso’s narrative remains constructive with some downside risks to keep in mind.

Euro Losing Momentum
The euro gained strength after the U.S. government shutdown though remains in the 1.16-1.18 range, trending downward as investors look to determine what the short-term future looks like for the currency pair which has seen a 15% rally YTD.

After trading as high as $1.1919 against the dollar on September 17^th, the euro appeared poised to continue climbing as a worsening labor market and pressure from the Trump administration to lower rates presented a more compelling downside case for the U.S. dollar. However, Jerome Powell’s recent remarks Tuesday and hawkish tones from other Federal Reserve Governors, coupled with a resilient U.S. economy have muted some of those concerns.

The European Central Bank has seen slower growth this year though inflation seems to be largely in line with expectations with the most recent print on target at 2.0%. On the labor front, the Eurozone posted a slightly higher unemployment rate of 6.3% vs 6.2% expected but the European Central Bank appears to be right where it wants to be on the overnight rate, as indicated by ECB member Martins Kazaks who remarked that the interest levels are at a “very appropriate level.”