Yen and Euro Fall on Policy Uncertainty

CURRENCY FUTURES

US DOLLAR: The USD index is higher as politics dominates currency markets Monday. Political uncertainty in France and Japan’s new prime minister led the dollar to advance strongly against the euro and yen. Focus in the US will largely center around the shutdown and the Fed’s September meeting minutes out on Wednesday. Investors will scrutinize opinions regarding the risks to employment and inflation and any signals on how interest rates will move at the Fed’s meeting later this month and in December. Delayed data could be released later in the week if the government agrees to a stopgap funding plan.

EURO: The euro is lower following the resignation of France’s newly appointed prime minister and its government on Monday, just hours after its cabinet was announced. The news deepens France’s political crisis and places pressure on President Macron, as markets gauge whether or not the president will call for snap parliamentary elections, which could increase short-term uncertainty and see the euro fall further. The news led European stocks to fall and bond yields to rise as the surprise move creates uncertainty in one of the eurozone’s largest economies. On the data front, eurozone retail sales moved slightly higher in August, growing 0.1% month-over-month. Gains were led by higher sales of food, drinks, and tobacco. On an annual basis, retail sales grew 1.0%, down from the previous reading of 2.1%, and marking the slowest yearly pace of growth since July of last year. The eurozone economic data calendar is light this week. German manufacturing orders figures out Tuesday, German industrial production figures out Wednesday, and Italian industrial production figures out Friday will be the mainstay of economic data. Germany’s industrial production is expected to fall despite a rebound in factory orders. The European Central Bank is expected to leave its key interest rate unchanged for the remainder of the year.

BRITISH POUND: The sterling fell on Monday as the dollar gained. The pound is likely facing a spillover effect from eurozone markets following the surprise resignation of France’s prime minister. It is a quiet week for the British economic calendar, with Thursday’s RICS house price survey for September being the only notable data release. Markets are not pricing in a rate cut at the Bank of England’s November meeting as the central bank continues to battle persistently high inflation.

JAPANESE YEN: Yen futures are sharply  lower following the election of Sanae Takaichi by the ruling Liberal Democratic Party. Takaichi embraces debt-fueled government spending and downplays worries over government debt levels and is seen as a fiscal dove. In response to the election, bond yields rose above 1.68%, their highest levels since 2008, as markets worried that Takaichi’s policies will increase bond supply and could delay interest rate hikes by the Bank of Japan. The yen swaps market indicated just less than a 50% likelihood of a rate hike by December, down from 68% on Friday. Taikaichi, following her win, emphasized the need for close coordination between the government and BoJ to achieve demand-driven inflation, supported by growth in wages and in corporate earnings. A parliamentary vote is scheduled for mid-October to confirm Takaichi as Japan’s next prime minister. On the central bank front, Governor Kazuo Ueda on Friday reiterated that the bank will resume interest rate hikes if growth and inflation targets are met, although he noted that corporate profits have been subdued due to US tariffs.

AUSTRALIAN DOLLAR: The Aussie was little changed against the dollar Monday following the release of the Melbourne Institute’s monthly inflation gauge that showed a 0.4% increase in September, up from a 0.3% drop in August. The uptick in inflation, although not an official reading, added to market sentiment that official Q3 inflation could prove hotter than expected, something that the Reserve Bank of Australia had noted last week as it left rates on hold. Opinions of a November cut from the bank are split, as markets imply around a 45% chance of a quarter-point rate cut in November compared to nearly 100% a month ago. Markets will look to comments from RBA officials this week for clues on the policy path in November. On the data front, building approvals Tuesday will lead the show.

STOCK INDEX FUTURES

The indexes are higher as AI optimism continues to fuel gains. Advanced Micro Devices (AMD) announced a deal with OpenAI to deploy 6 gigawatts of AMD GPUs over multiple years, with AMD also issuing OpenAI a warrant for up to 160 million shares. AMD shares rose more than 22% in premarket trading. Mega-cap stocks also led gains, with the Magnificent Seven mostly higher ahead of the open. Focus in the markets this week will center around any developments with the government shutdown. If the shutdown continues, official US data will continue to be delayed as well as data collection efforts, which could raise questions in the future about the accuracy of upcoming data. Republicans and Democrats appear to remain at a stalemate, signaling that the shutdown could persist for longer.

Highlighting the economic calendar will be the Fed’s meeting minutes from its September meeting out on Wednesday and the University of Michigan consumer sentiment surveys out on Friday. Trade data for August out on Tuesday, and weekly jobless claims figures will be delayed if the shutdown continues. If Washington resolves the shutdown, September’s nonfarm payroll figures and other delayed reports could be released during the week, which would likely add a stir of volatility to markets.

ISM Services PMI data out last Friday showed that activity stalled in September, with the index falling to 50, down from 52 in August. Forecasts were expecting a reading of 51.7. The survey showed that employment remained in contraction territory, as companies delayed hiring and also reported difficulty in finding qualified staff. On the price front, price pressures grew with the prices index hitting 69.4, the second-highest reading since October 2022. The data reflects the situation the Fed has been facing over the last several months: downside risks to employment and upside risks to inflation as a result of tariffs. The data is also significant as the services sector makes up roughly 80% of the US economy, signaling economic developments that could arise in future data releases.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve as political turmoil in France and policy uncertainty in Japan led to a rise in global bond yields. Markets in the US will prepare for a fresh round of Treasury auctions with $58 billion in three-year notes on Tuesday, $39 billion in 10-year notes on Wednesday, and $22 billion in 30-year bonds on Thursday.

Investors will scrutinize the Fed’s meeting minutes out Wednesday for any signals about whether more interest rate cuts could come in October and December. Markets are currently pricing a 95.7% chance of a 25 bps cut in October and an 84.1% chance of a following cut in December. Any insights on policy moves and views on the double-sided risks to employment and inflation will be watched closely. In Fedspeak, members Bostic, Bowman, and Kashkari will speak on Tuesday. With the shutdown looking to further delay economic data out of the US, Wednesday’s meeting minutes and this week’s Treasury auctions will likely serve as the main market movers along with any political developments, either domestically or abroad.

The spread between the two- and 10-year yields rose to 56.10 bps from 53.7 bps on Friday, while the 2-year yield, which reflects interest rate expectations, rose to 3.597%.

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