Despite the US government shutdown, a likely delay of US payrolls release today, and Trump’s threats to fire more Federal workers, markets have stayed remarkably resilient. Amid political gridlock, US equities have surprisingly firmed this week. This could be due to better sentiment towards AI related tech stocks, given news that OpenAI’s valuation has soared to USD500bn, becoming the world’s most valuable private company. Thus, even as US growth risks mount on a government shutdown, the US dollar has stayed resilient, with the DXY holding above 97.50.
The corollary of benign financial market conditions is unusually low FX volatility across the board. EUR/USD 1M at-the-money implied volatility has broken below its summer lows and is close to its lowest in 11 months. Even USD/JPY, which faces event risks surrounding LDP leadership elections and a better than even chance of a BOJ rate hike later this month, is seeing 1M implied volatility near its summer low. Optionality could be under-priced as markets downplay a growing list of risks, including a French budget impasse, an extended US government shutdown, and a possible shift in Governor Ueda’s rhetoric to lay the ground for a near-term rate hike. USD/JPY puts may have better risk-reward, as political uncertainty for Japan is set to abate after the election of a new LDP President this weekend. While Koizumi is in the lead based on Polymarket odds, a Takaichi premiership is also not necessarily a significant risk for markets, as she has clearly moderated her stance on both fiscal and monetary policies in her current campaign.
In North Asia, mainland China and Korea are both out on extended holidays. Nevertheless, strong performance of Hong Kong-listed stocks led by foreign buying suggests that offshore RMB sentiment could be supported. USD/CNH could ease somewhat, though RMB appreciation is likely to be very modest still amid continued manufacturing headwinds.
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