After a busy Thursday of trading that saw the Dollar Spot Index gain more than a percent and the USD run up against all major currencies to the same tune, the United States Dollar is in far more muted territory this morning.
Overview
Yesterday’s CPI release for the month of September provided markets with the news they wanted to continue this month’s Dollar bullish run. Though bets on an interest rate hike in November remain relatively unchanged, traders have begun to look toward December’s meeting of the Federal Reserve for a potential 25 basis point increase. The odds of any easing over the next calendar year have also decreased substantially, allowing USD to hold on to most of yesterday’s gains.
Israel overnight called for an evacuation of all civilians in Gaza City – some 1.1 million people – and gave UN staff 24 hours to move from nearby areas, laying the foundation for a potential ground invasion over the next few days. Treasuries and crude oil both rallied on the news. As speculation rises around future real Iranian involvement, markets are facing a growing possibility that Iranian oil output into international markets could be drastically reduced both as a result of conflict and of new international sanctions, currently being discussed in Congress.
Longer-term risks to USD’s strength over the last quarter do remain, notably on the potential of even further congressional gridlock. After last month’s 45-day spending stopgap package, the government once again is just a month out from running out of funding and entering a shutdown. This could be exacerbated substantially by congressional leadership struggles – last week’s ouster of House Speaker Kevin McCarthy has left a leadership vacuum in the lower chamber, and the GOP’s consensus candidate to replace him ended his run for the position last night. October has seen a continuation of the strong Dollar trend from the summer, but November is fraught with domestic risk.
What to Watch Today…
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CAD ⇑
The Canadian Loonie is gaining more than other G10 currencies against USD this morning on the heels of a four percent spike in WTI crude oil futures overnight. As the risk of an oil shortage in the international market increases because of the Levantine conflict, demand may shift further toward Canadian production, buoying the currency. CAD has been the least volatile currency in the G10 over the last 30 days, but geopolitical risk could change that and give the Loonie some strength through the remainder of the year.
JPY ⇑
Japanese Yen, after sliding dangerously close to yet another intervention threshold yesterday, has recovered some ground this morning against the USD both on traditional haven appeal and on, yet again, rumblings of Chinese stimulus and economic intervention. China’s consumer inflation flatlined in September, but reports did break overnight that the nation is considering the formation of a state-backed stock stabilization fund to shore up markets.
