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The world economy is limping into November 2025, buffeted by geopolitical crosswinds, policy fragmentation, and structural shifts that defy easy categorization. Despite record highs in many equity markets, beneath the surface, the global order is being re-engineered—one export restriction, cyberattack, and parliamentary deadlock at a time.

US-China Tensions Move Away from the Immediate Brink

Let’s start with the main event: the U.S.–China tech war. Washington thought it had cornered the semiconductor chessboard. By the end of September, the U.S. had expanded its extraterritorial export controls, tightening the screws on Chinese firms and their subsidiaries abroad. The sanctioned entity list grew longer, and the US appears to have encouraged the Netherlands to takeover the domestic operations of the Chinese-owned chip company, Nexperia, or the company would have been added to the list of sanctioned entities. 

But Beijing didn’t blink. Instead, it countered with its own extraterritorial licensing regime for critical minerals and technologies. It broadened and tightened its export licensing requirements for critical minerals and threatened to deny approval for any military application. The new rules meant that even foreign firms using Chinese-origin materials could face restrictions. It’s a mirror image of Washington’s playbook, and it’s aimed squarely at the semiconductor and AI sectors that have powered U.S. stocks and growth this year. Those two sectors alone account for roughly 40% of U.S. GDP expansion in the first half of 2025. 

A de-escalation was agreed in late October that provides for the shipment of rare earth magnets to US industry and a resumption of Chinese purchases of US agriculture goods, and possibly, energy. The port levies have been suspended, that the subsidiaries of sanctioned Chinese companies, will themselves no longer be sanction. The truce will ostensibly last a year; however, many are skeptical that it will be that durable. The US China hawks feel betrayed, and China's supply chain leverage extends beyond critical earths and magnets. Beijing has imposed export licensing requirements for EV batteries, and it dominates many precursors for pharmaceuticals. Chipmakers, like Nvidia and AMD continue to rely on inputs from China. 

Europe Faces Economic and Political Challenges

Europe is no safe harbor. Germany, the continent’s industrial engine, is sputtering. Industrial output has collapsed to 20-year lows, dragged down by weak global demand, high energy costs, and a painful transition away from combustion engines. The export model that sustained Germany for decades is cracking, and there’s no obvious replacement.

France isn’t faring much better politically. President Macron is struggling after last year's snap parliamentary elections failed to give his reforms a mandate. He miscalculated. The electorate balked. After going through three prime ministers, Macron has allowed a dilution of his controversial agenda. The retirement age will not be raised until after the 2027 president election, and the extent of budget cuts were reduced (next year's deficit may be 5.4% of GDP rather than 4.8%, and large businesses will face a higher tax while small businesses may see a cut. 

Meanwhile, Russia continues its hybrid war against Europe. Fighter jets and drones have violated NATO airspace in the Baltics and Eastern Europe, while cyberattacks on infrastructure—from power grids to rail networks—have intensified. It’s a low-grade conflict designed to destabilize without triggering Article 5, and it’s working. European defense budgets are rising, but coordination remains patchy.

A new flash point between the US and Europe may emerge in November. The EU is considering ESG legislation that would apply to US businesses. The Corporate Sustainability Due Diligence Directive requires viable climate transition plans and exposes legal liability for environment and human right violations in the value chains. US business groups have reportedly sought help from the US government to deter Europe. Many European businesses have also sought some dilution of the effort. The European Parliament is set to vote on the directive on November 13, and if it passes, it goes to the member states for approval. 

Takaichi's Victory Shakes Japanese Politics

Across the globe, Japan has made history. The Liberal Democratic Party selected Takaichi Sanae as its new leader, making her the country’s first female prime minister. Takaichi has embraced the LDP’s traditional policy mix: easy money and fiscal stimulus. 

However, by not endorsing stronger reforms in the campaign finance, Takaichi lost the support of the LDP's junior partner for 26 years, the Komeito Party. However, she struck an accord with Japan's Innovation Party, and this solidifies her government. The new government, coupled with uninspiring data kept the Bank of Japan on the sidelines. Markets have responded predictably. The yen weakened sharply in October (almost 4%), and Japanese stocks have risen dramatically (the Nikkei's 16.6% rally was the largest monthly advance since October 1990). 

The broader global picture is one of divergence. The U.S. economy is outperforming, but the government shutdown acts as a drag. Europe is practically stagnating, and the German and locomotive continues to sputter. Japan is reflating, but at the cost of currency stability. China is slowing but flexing its geopolitical muscles. India and Southeast Asia are bright spots, benefiting from supply chain diversification and domestic demand.

December Fed Cut Odds May Be Too High

Central banks are threading the needle. Even with the government closed, the Federal Reserve resumed its easing cycle as the deterioration of the labor market offset the price pressures, which many officials want to look through as induced by the tariffs. There is more room for the market to reconsider the odds of a December cut. Despite Fed Chair Powell's best efforts, as the month closed, the derivatives market is still discounting about a 2/3 chance of a cut. 

We lean the other way. Without more evidence of either weakening of the labor market or easing of price pressures, The ECB may have completed its easing cycle, though risks mount for a cut next year. The market has pushed out a hike by the Bank of Japan into next year. China is cautiously loosening policy, trying to support growth without fueling asset bubbles.

Precarious Time

Trade policy has become a weapon. Export controls, investment screening, and industrial policy are now standard tools. The era of US-led globalization may be over, but through the strategic decoupling and focus on national security, new trade patterns are emerging that bypass the United States. The US accounts for about 15% of the world's goods trade. The other 85% seems more promising. 

Canada now imports more cars from Mexico than the US, for example. Peru is seeking customers for its blueberries in Asia, Europe, and Africa. China is replacing US soybeans with product from South America. It is replacing US beef with Australian beef. New trade groups are forming. The World Trade Organization revised its estimate for merchandise trade growth to 2.4% from 0.9%. Last month, the IMF revised its forecast for world growth to 3.2% from its July projection of 3.0%. Its forecast for next year's growth was unchanged at 3.1%. 

The risks are asymmetrical and biased lower. A misstep in the Taiwan Strait, a cyberattack on critical infrastructure, a prolonged shutdown of the US federal government could trigger outsized market reactions. A failure by Washington and Beijing to head off further escalation of their trade conflict could increasingly catch others in the crosshairs. Investors may be optimistic, but the tail risks are fattening.

As we head into home stretch for 2025, the global economy is not in crisis—but it is in a precarious position. The tectonic plates are shifting, and the old maps no longer apply. The challenge for investors, policymakers, and businesses is to navigate a world where the rules are being rewritten in real time.  

Bannockburn World Currency Index 

Bannockburn's World Currency Index, a GDP-weighted basket of the currencies of the dozen largest economies, fell for the second consecutive month. This reflected the decline of nearly all the components. The Russian ruble was the chief exception. It appreciated by about 2.4%. The Chinese yuan and Indian rupee eked out negligible gains. 

The Japanese yen was by far the weakest component. It fell by a little more than 4%. Sterling has the dubious honor of being the second weakest. It fell by about 2.4%. Among the high-income countries, the Canadian dollar fared best, losing about 0.65%. The Canadian dollar often outperforms in a firm US dollar environment. 

We had suggested last month the BWCI decline did not look complete. After the roughly 0.65% fall in October, the pullback still does not appear over. It appears to have scope for another 0.50% decline. This is consistent with additional dollar gains. We suspect there is more scope for the market to downgrade the chances of a Federal Reserve rate cut in December. The capital flight/dollar debasement meme in the financial press chiefly a first half story. Bannockburn's World Currency Index peaked on July 1. To be sure, we retain a medium and longer-term bearish dollar outlook, but we see near-term scope to extend the upside correction. 

U.S. Dollar:Although the US government was shut for the month of October, the dollar and stocks rallied. It was only the second month this year that the Dollar Index rose. The Atlanta Fed's GDP tracker estimates Q3 GDP of almost 4%, while the median forecast in Bloomberg's survey is for 2.7%. Spending related to AI is thought to account for more than half of US growth this year. The Federal Reserve cut rates in late October, but Chair Powell made an effort to dissuade the market from being confident of another rate cut in December. The market downgraded the odds from a little more than 90% to a still high 70%. There is room for further adjustment as Federal Reserve officials emerge from the self-imposed blackout period before the FOMC meeting. We lean against a December rate cut. The lack of US data, which may persist even after the government re-opens. The fact that headline inflation has risen for five consecutive months may steady the Fed's hand in the absence of further deterioration of the labor market, which Powell explicitly said he does not anticipate. Of course, as the longer the government shutdown lasts, the more disruptive it becomes. About 1.4 million federal employees missed a full paycheck in October. Roughly half are furloughed, while the other half are working without pay. A rule of thumb is that every week shaves GDP by 0.1%. Meanwhile, the tariffs the US imposed under the International Emergency Economic Powers Act (IEEPA) have been challenged, and the Supreme Court will hear the oral arguments on November 5. Reports suggest a secondary market has emerged for the possible tariff refunds if the Supreme Court rules that the tariffs exceeded presidential authority. 

Euro: After rallying in the first half of the year, the euro entered a broad sideways phase. The range is about $1.15-$1.18. A downside breakout in late July proved false, as was the upside break higher to a new multi-year highs near $1.1920. The US two-year premium over Germany from over 200 bp in late May to about 150 bp, in mid-September and rose to a little above 160 bp. The current policy rates are about 225 bp wide. The swaps market implies a 100 bp differential in a year. Europe is being squeezed by the combination of China's export controls of critical minerals and EV battery technology threaten European industry, which has already had to deal with the import shock from China, the tariff shock from the US, and the hybrid warfare by Russia. The Dutch government take-over of the Nexperia (the previous Netherland's based chip business purchased by a Chinese company) to avoid US sanctions appears to have created unintended consequences and the ire of Beijing. It is in an awkward position now that the US has agreed not to sanction the subsidiaries of Chinese companies on the entity list. The German economy struggles to sustain forward momentum, and neither Beijing nor Washington seem to take it seriously. France is in an uneasy political stalemate, which has further eroded its debt quality. . The swaps market reflects the view that the ECB is done easing. The indicative pricing is for less than 50% of another cut next year. 

(As of October 31, indicative closing prices, previous in parentheses) 

Spot: $1.1535 ($1.1705) Median Bloomberg One-month forecast: $1.1675 ($1.1770) One-month forward: $1.1555 ($1.1725) One-month implied vol: 5.3% (6.3%)

Japanese Yen:The policy mix anticipated by the new Japanese government weighed on the yen in October. The yen's roughly 4.0% decline is led the G10 currencies lower. Japan industry is vulnerable to the new export controls introduced by China. The surge in oil prices following the US (and EU) sanction Russia's two large oil companies lifted oil prices sharply and that also works against the yen. with a new support package being put together to help absorb some of the price pressures and promote key sectors, like AI, chips, and processing critical minerals. After a dismal August, the economy recovered in September, but it seems fragile, especially given Beijing's threat, even though the Nikkei and Topix are at record highs. The long end of the bond market rallied, and the 30-year was hovering near 3% in late October, the lowest since early July. The OECD's model of purchasing power estimate that the yen is a little more than 60% undervalued and has not been less undervalued that 50% in the past two years, and yet Japan continues to run a trade deficit. Domestic political considerations and geopolitical forces overwhelmed the usual driver of the exchange rate, US rates. The dollar has recouped nearly 3/4 of the losses inflicted in the first four months of the year. While a move toward JPY155 cannot be ruled out, the dollar's recovery of nearly 10% since April's low appears stretched, especially given the gravitational pull of interest rates. The US 10-year yield premium over Japan fell to about 230 bp, the least in three years, before firming into the end of the month. 

Spot: JPY154.00 (JPY149.50) Median Bloomberg One-month forecast: JPY150.30 (JPY147.60) One-month forward: JPY153.55 (JPY149.00). One-month implied vol: 7.8% (8.4%)

British Pound: In October, sterling extended the downtrend begun with the downside reversal 2 1/2-month high ($1.3725) after the Federal Reserve's rate hike on September 17. It was sold to its lowest level since April at the end of October, slightly below $1.31. There has been renewed speculation of a Bank of England rate cut this year. The odds implied by the swaps market increased from almost 25% at the end of September to a little less 70% at the end of October. The market is pricing in about a 30%chance of hike at the November 6 meeting. That seems exaggerated. Instead, we suspect the Fall Budget on November 26 may be more impactful. After a six-week campaign, the Labour Party chose Powell as deputy leader. She is seen as part of the more left criticism. This was seen too in a byelection in the Welsh parliament in a district that ousted for the first time in more than a century. On the other hand, the Starmer government faces the challenge of Farage's Reform Party. Chancellor Reeve's budget must reflect these forces. There are also the fiscal reality and Labour's campaign promises. The GBP10 bln buffer projected is too small and she has is talking about increasing it, which means tax increase and/or spending cuts. No one is likely to be happy with the results. Marginal tax rates on the highest incomes may be raised; thresholds could be adjusted so one pays higher taxes (bracket creep). taxing private school fees are reportedly under discussion. Sterling rose by around 14% from the January low through July 1 (to almost $1.38). With the late October losses, it has fallen slightly more than 5%. The $1.2950-$1.3000 area offers the next target. 

Spot: $1.3150 ($1.3400) Median Bloomberg One-month forecast: $1.3335 ($1.3505) One-month forward: $1.3155 ($1.3405) One-month implied vol: 7.0% (6.3%)

Canadian Dollar: The Canadian dollar was the performers in the G10 in October. It fell by about 0.65% against the US dollar. The Bank of Canada began easing last year as the economy weakened, but the disruption from the US was still meaningful. A new flash point emerged as the province of Ontario ran an advertisement during the baseball World Series that showed former President Reagan's critical of tariffs. President Trump was irate and suspended all trade talks with Canada and slapped an additional 10% tariff on Canada (though as of the end of the month, it does not appear to have been implemented). Prime Minister Carney is seeking new trade ties and aims to double Canada's exports to non-US parties in the next decade. A new flash point may emerge if Canada strikes a trade deal, even if limited, with China. The US imports around 80% of the potash it consumes and Canada accounts for a little more than 90%. Canada has not sought to weaponize potash. The US dollar may re-challenge the six-month high set in October near CAD1.4080. A move above there targets the CAD1.4160 area. 

Spot: CAD1.4010 (CAD 1.3940) Median Bloomberg One-month forecast: CAD1.3900 (CAD1.3825) One-month forward: CAD1.3990 (CAD1.3920) One-month implied vol: 3.9% (4.3%)

Australian Dollar: The Australian dollar's downside correction that began with new highs of the year a little below $0.6710 when the Federal Reserve cut interest rates on September 17 and continued through the first half of October. Intraday spikes to $0.6440 were snapped up and the Australian dollar did not settle below $0.6485 after the low was recorded. Still support around $0.6530 looks vulnerable.An adjustment of expectations of the trajectory of monetary policy may have also been completed around the middle of October. The implied policy rate at the end of 2026 fell from 3.35% to a little below 3.10%, where is also where it bottomed in mid-September.The futures market sees practically now chance of a rate cut in November and December. The critical minerals pact with the US and President Trump's affirmation of the submarine deal under AUKUS further strengthens the bilateral relationship. Although Australia's stock market is at record highs, its less than 9% gain year-to-date underperforms most of bourses among high-income countries. We continue to see potential into the $0.7000-$0.7200 area by the end of next year.

Spot: $0.6545 ($0.6545) Median Bloomberg One-month forecast: $0.6625 ($0.6600) One-month forward: $0.6550 ($0.6555) One-month implied vol: 7.4% (8.1%). 

Mexican Peso:The dollar spent most of October trading quietly in the trough after declining in the first three quarters. The greenback recorded the low for the year in September near MXN18.20. The low for October was set the first day of the month around MXN18.24. There were three sessions in which the dollar traded above MXN18.60 and all three took place when US equities fell. Although price pressures are elevated, and the core rate is above the upper end of the target range (3% +/- 1 percentage point), the concerns about growth are more salient for the central bank. In Q3, the economy contracted on a year-over-year basis for the first time since Q1 21. Banxico is likely to cut its overnight target rate by 25 bp in early November to 7.25%. The swaps market anticipates another cut in H1 26 and sees the terminal rate near 7%. The external account looks healthier with a trade deficit of almost $3 bln recorded in the first nine months of the year compared with a nearly $19.5 bln shortfall in the first three quarters of last year. President Sheinbaum continues to receive high marks for navigating around and with the mercurial US president. Her public support remains high. Colombia and Brazil have more strained relationships with the US administration. The high yields offered relative to Mexico have lent their respective currencies more support in the past month. Since the Federal Reserve's rate cut in mid-September, Mexico's carry for dollar based investors has not been sufficient to compensate for the spot movement. 

Spot: MXN18.55 (MXN18.3670) Median Bloomberg One-month forecast: MXN18.6025 (MXN18.6550) One-month forward: MXN18.6075 (MXN18.4280) One-month implied vol: 7.3% (8.4%)

Chinese Yuan: The Chinese yuan was practically flat against the US dollar in October. This leaves the onshore yuan about 2.5% lower year-over-year, and the offshore yuan down about 3.0%. Still, there were two notable developments. First, the PBOC has steadily lowered the dollar's reference rate in the daily setting. It has been taken to its lowest level since last October, and the campaign does not appear over. Through the setting of the "fix" that officials exert broad control of the exchange rate. It does not permit trades that imply the dollar move more than 2% from the reference rate. Second, because the yuan shadows the dollar so tightly and the dollar has fallen against most currencies, so has the yuan. However, that is really more of a story for the first half of the year. Since the end of June, the dollar, and therefore the yuan, has appreciated against most G10 currencies, including a little more than 7.0% against the Japanese yen, 4.9% against sterling, and 3.5% against the Canadian dollar. The euro is off around 2.8%. The South Korean won has fallen by nearly 6% and the Taiwanese dollar has lost about 4.4%. The broad strokes of what may shape China's next five-year plan, to be published next spring, emerged and it seems Beijing is committed to becoming less dependent on foreign inputs while still maintaining absolute advantage in several key sectors or "commanding heights". Despite claims that China is export-dependent, as a percentage of GDP, near 20%, they are quite modest for other major countries, with US as the notable exception (~11%). The dollar spent October between about CNH7.0850 and CNH7.15. It finished near CNH7.1200. There may be scope to probe the upper end of the range, but we do not expect to see much beyond it. 

Spot: CNY7.1200 (CNY7.1345) Median Bloomberg One-month forecast: CNY7.1095 (CNY7.1225) One-month forward: CNY7.0870 (CNY7.1055) One-month implied vol: 2.5% (2.6%)

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