Foreign Exchange Commentary

Summary

• Canadian dollar flat ahead of Bank of Canada’s Rogers speech.
• The U.S. dollar hit a 2-month high as Japanese yen and euro currency remain under pressure.
• Japanese yen weakens past 153 for the first time since February; some traders believe it may have a one-week reprieve of central bank intervention as President Trump may visit Japan imminently.
• U.S. Treasury yields at 4.14% on the 10-year bond yield remain in the 4.07% to 4.20% band the past three weeks.
• New Zealand dollar extends drop as RNBZ cuts cash interest rate 50 bps earlier this week; touches 6-month low.
• U.K. pound sterling marginally softer as Bank of England’s Mann says high inflation is inhibiting U.K. consumers.
• Mexico peso weakens marginally today above 18.30 per U.S. dollar.
• U.S. lack of economic data continues as government shutdown enters ninth day.
• CBO estimates U.S. 2025 Fiscal Year deficit at $1.809 trillion.
• Use of Federal Reserve’s repurchase (repo) facility hits lowest since April 2021.
• Gold continues ‘bull’ run, surpassing $4,000/ounce.

U.S. Dollar Drops First Time This Week, AUD$, CAD$ Outperform
Japanese Yen Continue Decent; Briefly Tops 153 per U.S. Dollar

The U.S. dollar had risen every day this week apart from today, although the ‘give-back’ was extremely marginal. Investors are increasingly betting on a weaker British pound sterling via the options market ahead of the November 26 U.K. autumn budget.

Risk reversals show a greater skew towards put options in sterling versus the dollar, which bet on the exchange rate falling after the budget.

Two-month risk reversals in the currency pair showed the biggest skew towards put options since April at -1.145% on Wednesday and are last around -1.105%, LSEG data show.

This illustrates that the options market is becoming “increasingly nervous” about the budget amid concerns over government debt, one FX analyst said in a note.

Sterling fell to a nearly two-week low against the dollar after the Federal Reserve’s latest meeting minutes showed policymakers were divided over the pace of future interest-rate cuts.

“This aligns with our recent view that the pound’s near-term fortunes are largely determined by dollar dynamics and global risk appetite rather than U.K. fundamentals,” analysts said.

However, markets continue to price in minimal odds of a Bank of England rate cut in November, limiting sterling’s losses, they say. BOE member Catherine Mann said Thursday policy must remain restrictive for longer to combat inflation.

In continental Europe, the euro currency could resume its upward trend against the dollar if political stability is restored in France without the need for fresh elections according to FX traders.

News that French President Emmanuel Macron could announce a new prime minister could offer some reprieve to the euro. Macron is expected to name a new prime minister by Friday after Sebastien Lecornu resigned from the role on Monday less than a month after being appointed. “There would be huge pressure to call another snap legislative election if his efforts to cobble together a government and find support for a budget were to fail again,” analysts said.

In this case, the euro could stay weak on political uncertainty. If elections are avoided, some FX traders expect the euro to reach $1.20 by year-end.

“This has come as a surprise to a market that had felt that the next chapter in the French political saga could only be new and divisive elections,” one FX analyst stated. The news helps to narrow the spread between German and French government bond yields, and this could offer support to the euro, the analyst added.

Meanwhile, the U.S. government shutdown goes on. Weekly jobless claims report is delayed for the second consecutive week. Economists surveyed expect 230,000 new claims, which would keep the layoffs gauge within range.

In Asia, the Japanese yen could fall further as expectations that interest rates will stay lower for longer encourage investors to use it as a funding currency in so-called carry trades, FX analysts predicted. Carry trades involve investors borrowing in a low-rate currency to invest in a higher yielding one. Sanae Takaichi’s election as leader of Japan’s ruling party diminished prospects for further rate rises.

While the Bank of Japan could still raise rates in October, it is not guaranteed. And until that point, low volatility means the carry trade will stay popular—now with the yen as the preferred funding vehicle. The dollar rose to a nearly eight-month high of 153.21 yen, in wholesale interbank market trading.

Most Asian currencies strengthen slightly against the U.S. dollar in the morning session amid risk appetite. Wall Street’s rebound overnight, led by the tech sector, has resulted in risk-on sentiment, Commerzbank Research’s analysts say in a research report.

Also, the minutes of the FOMC’s September meeting indicated that Fed officials expressed a willingness to cut rates further this year, though the minutes also showed that they will take a balanced approach, the analysts add.

 Finally, this week, the New Zealand dollar fell to a 6-month low after the Reserve Bank of New Zealand surprised markets by cutting interest rates a full fifty basis points.

As mentioned in the ‘Summary’ above precious metals led by gold continued the 2025 commodity rally, with gold exceeded a record $4,000 an ounce.