Dollar advances as markets remain cautious

Investors prepare for critical incoming data

With the clock ticking down to the key events scheduled for the latter part of the week – particularly the long-awaited US CPI report – markets remained in a relatively upbeat mood on Monday, as seen in both US equities and gold.

The absence of new developments or major news did not stop investors from pushing both markets to new all-time highs yesterday, although there is a small reversal taking place at the time of writing. That said, the Q3 earnings round is progressing fairly well, with investors mostly focusing on this week’s Netflix, Tesla and Intel results.

These moves are taking place while the US dollar has been on the front foot since last Friday, with euro/dollar dropping to 1.1620 today. The absence of Fedspeak due to the usual blackout period, remarks from US officials about the end of the US government shutdown, and the balanced rhetoric from US President Trump towards China have been boosting the dollar.

That said, the upcoming tariff negotiations are not going to be a one-way street, so ups and downs are expected along the way. Last night, Trump repeated his threat to impose a 100% tariff surcharge on Chinese imports on November 1 if a deal is not reached by then.

Today’s small profit-taking reaction might be linked to Trump’s reminder, but, at the same time, the majority of investors believe that a last-minute agreement will be reached, or another extension will be granted. The next key date on the agenda is the ASEAN and APEC summits at the end of October.

Interestingly, the Fourth Plenum of the 20th Central Committee of the Communist Party is currently underway, hence certain key announcements, such as new support programmes, could be announced.

Not everything is great in markets though

Cryptocurrencies are not enjoying this period, failing to follow equities higher. Yesterday’s rally in bitcoin towards $112k has quickly evaporated, with the king of crypto hovering around 108k, at the time of writing. Altcoins are seeing bigger losses, with ether quickly returning to sub-$4,000 territory.

Similarly, while most commodities are recording fresh highs, WTI oil is trading near $57.50 at the time of writing. It is already down 8% in October, the third consecutive negative month. Interestingly, since late July, oil prices have dropped by 17%, while gold and silver have rallied by 32% and 41% respectively.

Investors are trying to understand the collapse of oil’s historically positive correlation with both US equities and gold. With US bond yields dropping, the threat of inflation does not seem to be a major factor in current price movements. Similarly, a recession scenario would justify lower oil prices but not the aggressive rally in equities. Therefore, with oil demand remaining relatively modest, the current crash in oil prices could be seen as a pure supply-side reaction.

LDP’s Takaichi becomes PM, yen weakens

Following frantic negotiations, the new LDP leader has gained enough votes to be officially elected as Japan’s new prime minister. Takaichi is expected to make her first international appearance at the APEC summit, potentially holding one-to-one talks with President Trump, with investors gradually pricing in her pro-fiscal agenda.

Naturally, the yen does not seem to share the LDP’s jubilation. Since Friday, when significant progress was made in the LDP-Ishin coalition negotiations, dollar/yen has been climbing, reversing the dip recorded after reaching the eight-month high of 153.26. This yen weakness could have legs if Takaichi insists on a looser monetary policy stance by the BoJ, denting the already modest chances of a December rate hike.