Expectations of two more Fed rate cuts this year have increased and is weighing on the USD. Certainly, a prolonged government shutdown and renewed US-China trade tensions do not add to confidence. But there could be two-way volatility as well amid risks from US-China trade negotiations. Indeed, US Treasury Secretary Bessent has threatened a decoupling from China if it implements export controls on rare earths, and the US is also working with G7 countries for a joint response on the sidelines of the IMF Autumn meetings in Washington. Bessent has also said that a stock market decline will not deter the US from taking strong action. Given the importance of rare earths for many high-tech applications, including in defence, a US-China trade deal may not be achievable if the issue is unresolved. Risks of tariff escalation, retaliatory trade bans on some commodities, or G7 co-ordinated measures cannot be discounted.
RMB has remained stable despite US tariff threats, anchored by the PBOC setting somewhat strong USD/CNY fixings around 7.10 this week. USD/CNH has eased below 7.13 amid the maintenance of a policy preference for RMB stability, which could be justified given strong Chinese exports data released on Monday.
USD/JPY has eased back to mid-150 levels as the Takaichi trade unwinds. We had said last week that JPY weakness is likely to be limited, not least because of political constraints. These constraints have come to the fore after the LDP lost its coalition partner Komeito, while opposition parties CDP, DPP, and Ishin are in talks to align policy agendas in support of Tamaki’s bid for PM. Combined, these three opposition parties hold more votes in the Lower House than the LDP. Takaichi, if she does become PM, will face constraints in implementing her policy agenda from not just opposition parties, but also moderate voices within the LDP itself. As such, short JPY trades may become more restrained.
USD/KRW has retreated towards 1420 after Korean authorities signaled that they are monitoring the FX market with caution on Tuesday. Indeed, KRW weakness has become extreme, driven by outflows from domestic investors into US markets on top of US-China trade tensions. Going forward, KRW outflows may slow amid US slowdown risks, which should support a recovery in the KRW.
Quote of the Day
“The government does not solve problems; it subsidizes them.”
Ronald Reagan
October 16 in history
US government shut down in 1986 due to disputes between President Reagan and the House.
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