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Overview: Neither the US nor China have backed away from the brink approached before the weekend, but the many market participants have concluded that this is an "escalation to de-escalate". The foreign exchange market has unwound some of the pre-weekend price action. The dollar-bloc currencies and Norwegian krone, which suffered before the weekend, are firmer, while the euro, sterling, and the yen has seen last Friday's gains pared. Emerging market currencies are mixed, with the Taiwanese dollar and South Korean won joining most central European currencies are the bottom of the emerging market currency complex today. Of note, the PBOC set the dollar's reference rate at its lowest level since last November and reported stronger than expected exports and imports in September. 

The US S&P 500 posted its largest drop in six months before the weekend, and Asian equities fell. Japanese markets were closed for a national holiday, but all the other large markets in the region fell, with the Hang Seng and the index of mainland companies that trade there down the most (~1.5%). Taiwan's market re-opened for its holiday and fell 1.4%. Europe's Stoxx 600, which fell by about 1.7% in the last two sessions, is up about 0.35% today. US index futures are trading broadly higher. The US 10-year yield fell 10 bp before the weekend (to 4.03%), and Antipodean yields fell today. European yields are mostly a little softer. The French political outlook is murky, and its 10-year yield is off about half of a basis point today. Gold has raced to a new record-high near $4080, and the squeeze in silver has lifted it slightly through $51.70. November WTI plunged to nearly $58.20 before the weekend, its lowest level since May, is back trying to establish a foothold above $60. 

USD: US banks are closed today and there is no Treasury market, but equities will trade. Investors and traders seem less concerned about the flare up in US-Chinese tensions, even though nothing has been resolved. The dates for the imposition of China's new export licenses and US 100% tariffs are after the potential meeting between Trump and Xi on the sidelines of the APEC meeting later this month. The fact that a bilateral summit was not arranged, however, was already a sign of tensions. The port levies for each other ships are effective tomorrow. The Dollar Index posted an inside trading day before the weekend, and it is trading firmly but inside the pre-weekend range. The key then is last Thursday's range, roughly 98.70-99.55. Last Friday's high was slightly below 99.45 and today's high has been a little above 99.20. 

EURO: The escalation of US-China tensions helped the euro recover ahead of the weekend. After reaching almost $1.1540 on Thursday, its lowest level since August 1, the euro recovered to $1.1630 and stalled on Friday. The $1.1630 level held earlier today, and the euro pulled back to about $1.1580. There are two developments to note today. First, the Netherlands invoked its "Goods Availability Act" to take control of Nexperia, a Chinese-owned Dutch-based semiconductor company. It follows the US decision in late September to automatically added subsidiaries are 100s of Chinese companies whose parent was the on the US entity list. Beijing said this was in violation of the truce struck with the US. The Dutch decision was implemented on September 30 but made public yesterday. Second, after resigning as prime minister last Monday, Lecornu was re-appointed prime minister of France on Friday. A new cabinet has been named, and a confidence vote is expected in the next few days. 

CNY: The dollar has forged a shelf near CNH7.12. Last week it approached the (50%) retracement of its losses since August 1 found near CNH7.1545. It is trading quietly today between CNH7.1320 and CNH7.1455. The PBOC set the dollar's reference rate at CNY7.1007, a new low for the year. (CNY7.1048 before the weekend). Separately, China reported an 8.3% year-over-year rise in September exports (4.4% in August), while imports surged 7.4% (from 1.3%). The trade surplus narrowed to $90.45 bln from $102.33 bln. Through September, China's trade surplus stands at nearly $876 bln, compared with almost $695 bln in the first nine months of 2024. China has replaced US demand. 

JPY: Japanese markets were closed today for a national holiday. The dollar has traded within the wide pre-weekend range. The dollar posted a key downside reversal ahead of the weekend. It made a new high for the move (~JPY153.25) and then was sold through and closed below Thursday's low (~JPY152.15). Today it is trading between JPY151.65 and JPY152.45 and is closer to the highs in the European morning. The drop in US Treasury yields and cautionary comments from the Japan's finance ministry also encouraged some profit-taking on long dollar positions. 

GBP: Sterling looked ugly. It was sold before the weekend to almost $1.3260, a two-month low. It looked to be headed lower, but the escalation of US-China tensions saw it recover to $1.3370. It settled above last month's low (~$1.3325-35), which helps lift the technical tone. It met the (38.2%) retracement of this month's losses (~$1.3365). In today's pullback, it found support near $1.3315. The UK reports employment data tomorrow. A close below $1.3320 could signa a return to the $1.3260 area. 

CAD: Canadian markets are closed today. The greenback stalled in the last two sessions near CAD1.4035. That is the highest level since April and overshot by a little the (38.2%) retracement of this year's decline (found around CAD1.4020). The better-than-expected Canadian jobs data failed to push the US dollar back below the 200-day moving average (~CAD1.3975). It straddled CAD 1.40 ahead in the waning hours of last week's activity. A break of the shelf around CAD1.3920 is needed to suggest a high is in place. It is trading between about CAD1.3985 and CAD1.4010 today so far today. 

AUD: The US dollar's weaker tone was not reflected in the Aussie ahead of the weekend. It was the weakest of the G10 currencies, losing a little more than 1% and returning to levels (~$0.6480) it had not seen since last August. There has been no follow-through selling today and the Aussie reached almost $0.6535 today to retrace a little more than (38.2%) of its losses since last Thursday's high near $0.6610. The (50%) retracement is around $0.6540. 

MXN: The risk-off mood ahead of the weekend punished the Mexican peso. Its 1% slide was the largest down move since the end of July. The Brazilian real was hit harder, tumbling nearly 2.4%. Fiscal concerns in Brazil added fuel to the fire, and Mexico reported an unexpected decline in August industrial output (-0.3% vs. median forecast in Bloomberg's survey for +0.4%). Still, risk-off helps explain the 0.66% decline in the JP Morgan Emerging Market Currency Index, its largest single day decline since the end of July. The dollar rose to MXN18.6050 before the weekend, its highest level in a month. It is also slightly above the (50%) retracement of the greenback's losses since August 1. The dollar held mostly below MXN18.54 today and found support slightly above MXN18.44. 

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