U.S. Government Shutdown Looks Nearly Inevitable

Overview

The US dollar (DXY) is mostly softer against the G10 currencies and emerging market currencies. The hawkish hold by the Reserve Bank of Australia has helped lift the Australian dollar almost 0.5% to a four-day high above $0.6700. The Japanese yen is up nearly as much despite poor industrial production and retail sales data. A US federal government shutdown looks nearly inevitable at this juncture. The US also announced 10% tariffs on softwood timber and lumber, as well as a 25% tax on kitchen cabinets, vanities, and upholstered wood products. Some will take place as soon as October 14, others not until January 1. Canada is the most exposed and is already subject to 35.2% duty meant to counter alleged subsidies and unfair pricing.

Equities were mostly firmer in the Asia-Pacific regions, but the South Korea and Australia markets traded lower. Europe’s STOXX 600 (STOXX) is nursing a small loss, and US index futures (SPX) are around 0.15-0.25% lower. Note that a third of the S&P 500 is in a blackout period ahead of earnings when they can no longer buy back their own shares. By mid-October, it will rise to around 80-85%. Benchmark 10-year yields are narrowly mixed in Europe, while the 10-year US Treasury yield (US10Y) is off a little more than a basis point to slightly below 4.13%. Gold is reversing lower after setting a new record high of almost $3871. It has now slipping through $3800. November WTI extended yesterday’s nearly 3.5% drop and is off another 1% today. It fell to $62.45 after finishing last week a little above $65.70.

USD: The Dollar Index extended last Friday’s pullback yesterday to slightly below 97.80 today to nearly 97.65, where the 20-day moving average is found. It met the (38.2%) retracement of the rally since the Fed’s rate cut on September 17. The next retracement (50%) is near 97.40. The US sees house prices, JOLTS, and the Conference Board’s survey, but with a federal government shutdown looming at midnight, the date may be of secondary concern. Still, FHFA house prices may have fallen for the fourth consecutive month in July and the S&P Cotality CS index of house prices may have slowed to post its smallest increase in two years. The Conference Board’s measure of consumer confidence likely ticked down. Still, despite the slowing of the labor market, elevated household debt stress levels, weakening consumer confidence, and slower wealth creation from home ownership, the consumption has been remarkably resilient. In last week’s Q2 GDP revisions, consumption rose 2.5% annualized, up from 1.6% initially, and 0.6% in Q1. And in the three months through August, personal consumption expenditures rose by more than income.

Euro: With yesterday’s gains, the euro met the (38.2%) retracement of its losses since the September 17 FOMC meeting (~$1.1750). It has made a marginal new high today near $1.1760. The next retracement (50%) is slightly above $1.1780. The data focus is two-fold: September inflation and August consumption data from Germany and France. German states have already reported their CPI figures, and the national EU-harmonized measure is seen rising by 0.1% for a 2.2% year-over-year pace. France’s EU-harmonized CPI rose 1.1% year-over-year from 0.8% in August. Italy’s CPI edged up to 1.8% from 1.6%. Turning to the consumption data, Germany retail sales unexpectedly declined by 0.2% (median forecast in Bloomberg’s survey was for a 0.6% increase) after it declined by 0.5% in July. French consumer spending rose 0.1%. It fell by 0.6% in July (initially -0.3%). The swaps market shows the market recognition that the bar to another cut is extremely high, with around 10% chance for Q4 ’25 and about a 34% chance in H1 ’26.

CNY: The dollar’s setback yesterday saw it give back nearly half of the gains it recorded since the FOMC meeting. That retracement objective was about CNH7.1165 and the low was slightly above CNH7.1185. Last week’s low was around CNH7.1115. It is consolidating quietly today between about CNH7.1250 and CNH7.1330. The PBOC set the dollar’s reference rate at CNY7.1055 (CNY7.1089 yesterday). China’s extended holiday begins tomorrow, and the markets do not re-open until October 9. The next big event is the plenum session (October 20-23). Out of it will emerge the general thrust of the next five-year plan (2026-2030). Ahead of the holiday, China’s September PMIs were reported. The takeaway was the manufacturing and services activity was little changed. The manufacturing PMI is at 49.8 (from 49.4) and the services PMI is at 50.0 (from 50.3). The composite stands at 50.6 (from 50.5). The former Caixin PMI (now RatingDog) runs a bit better than the official one, and the composite is 52.5 (from 51.9). The impact on the yuan and Chinese stocks seemed minimal. There are more press articles on foreign demand for Chinese equities. China’s CSI 300 rose 17.9% in Q3, which was one of the world’s top performers. The index of mainland companies that trade in Hong Kong rose by about 10.1%.

JPY: The dollar’s low yesterday, slightly below JPY148.50, was seen in early European turnover. It reached JPY147.80 in the North American session. The dollar’s losses have been extended to about JPY147.85 today. The (50%) retracement of the dollar’s rally after the Fed’s rate cut on September 17 is slightly below JPY147.75 and the (61.8%) retracement is around JPY147.20. The yen’s gains today come despite disappointing data. Japan reported that August industrial production fell by 1.2% in August, the same as July. It is the fourth decline in the past five months, and the two-month contraction is the largest since January-February 2024. August retail sales were expected to rise by 1.1%, and instead, fell by the same amount after sliding 1.6% in July. It is the worst two months since the pandemic. Nevertheless, the swaps market has increased marginally the likelihood of a BOJ hike before the end of the year to a little more than 80%. The data highlight this week is the Tankan Survey first thing tomorrow. It is expected to be little changed. Meanwhile, the political drama is unfolding. With no candidate likely to secure a majority in the first round of the LDP leadership election on Saturday, a run-off looks likely between Koizumi and Takaichi. Takaichi lost last year’s run-off against Ishida. Koizumi is running as a reform candidate, while Takaichi, more conservative, would be Japan’s first woman prime minister.

GBP: Yesterday, sterling reached a little above $1.3455 to meet the (61.8%) retracement of last week’s losses. Yet, it held below last Thursday’s high (~$1.3465) and the (38.2%) retracement of the losses since the FOMC meeting on September 17 (~$1.3480). Today’s high, set in early European turnover, was just shy of yesterday’s high. Initial support is seen around $1.3400-20 now. The UK took another look at Q2 GDP and confirmed the 0.3% quarter-over-quarter gain. Government spending helped offset the near-stagnant consumption and widening of the current account deficit. The drag from total business investment was not as bad as it initially appeared (-1.1% vs. -4.0% quarter-over-quarter). The median forecast in Bloomberg’s survey is for 0.2% growth in Q3 and Q4. The swaps market has the Bank of England on hold until Q1 ’26, when it has a nearly 74% chance of a cut discounted.

CAD: Between the FOMC meeting and last Friday’s high, the greenback rallied about 1.7% against the Canadian dollar. It reached almost CAD1.3960 before the weekend, its best level in four months. Yesterday’s pullback extended to nearly CAD1.3900. It is holding above yesterday’s lows but has been capped near CAD1.3925. Initial support is seen in the CAD1.3885-1.3900 area. It may take a break of CAD1.3870 to boost chances that a high is in place. Coming into today, the Canadian dollar is off about 1.33% for the month. Only the New Zealand dollar has performed worse (~-1.8%) among the G10 currencies. As we have observed, the Canadian dollar is typically a laggard in a weak greenback environment. Also, the swaps market has about an 80% chance of another Bank of Canada rate cut this year and sees the October 29 meeting as nearly a 50/50 proposition. The odds of a Federal Reserve rate cut are seen near 90%.

AUD: The Australian dollar fell to almost $0.6520 before the weekend. It settled slightly above $0.6540 and approached $0.6580 yesterday. It has risen to almost $0.6615 today, which met the (50%) retracement of last week’s decline from the September 17 peak (slightly above $0.6705). Australia reported a 0.6% increase in private sector credit in August, and the strength of consumption is part of the reason that the central bank had telegraphed today’s decision to keep cash rate target steady at 3.60%. RBA Governor Bullock again sounded a cautious tone and noted that inflation was not slowing as quickly as it was. The futures market had about a 70% chance of another cut in Q4 before today’s meeting and has downgraded the probability to close to 50%. The swaps market has a terminal rate of about 3.25% discounted.

MXN: The dollar briefly traded below MXN18.30 yesterday, its lowest level since the day after the Federal Reserve cut rates on September 17. It stabilized, and the dollar settled back inside the pre-weekend range. The greenback is trading quietly between MXN18.3280 and MXN18.3835 so far today. Through yesterday, Latam currencies were three of the top five emerging market currencies this month. The other two, South African rand and Hungarian forint, are also high yielders. However, the high yields failed to lift the Turkish lira, which fell by about 1% against the dollar. Yesterday, the Argentine peso snapped a five-day advance. After reporting a small rise in August unemployment (2.93% vs. 2.77%) yesterday, Mexico’s economic calendar is light today with its August budget due. Mexico projects a small primary budget surplus this year (budget balance excluding debt servicing costs). After last week’s rate cut (to 7.50%), the swaps market appears to be pricing another cut in Q4 and one more in Q1 ’26. We suspect the terminal rate may be 6.50-7.00%, a bit lower than is discounted by the swaps market.