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Overview: The dollar has come back bid. It is trading near session highs late in the European morning. The French crisis has not been resolved and the policy mix advocated by the new head of the LDP and soon-to-be prime minister continues to weigh on the yen. The US government remains closed, and the White House has sent mixed signals about its willingness to negotiate with the Democratic Party leaders. The Antipodeans are the weakest among the G10 currencies ahead of New Zealand's anticipated rate cut tomorrow. True to form, in a firm US dollar environment, the Canadian dollar does relatively better, and today, it is atop the G10 currencies. The greenback is at its best level in nearly seven months against the Japanese yen and is within striking distance of JPY151.00. The euro is near $1.1660. An expected drop in German factory orders is doing the single currency no favors. Most emerging market currencies are weaker, led by the central European currencies. 

Holidays closed the Hong Kong, mainland China, and South Korean markets. Most of the other large equity markets in the region, but Australia rose. Europe's Stoxx 600 snapped a six-day advance yesterday and is a little softer today. US index futures are little changed. A solid 30-year JGB auction helped Japanese bonds steady today. European benchmark 10-year yields are mostly 1-2 bp firmer and the 10-year US Treasury yield is slightly higher near 4.16%. Several Fed officials speak today, including Governor Bowman who has hinted at the need for quicker rate cuts. The US sells $90 bln of six-week bills today and $58 bln three-year notes. Gold reached a new record high near $3977.50 but has seen profit-taking pare earlier gains. November WTI is trading quietly inside yesterday's range (~$61-$62.15). 

USD: The North American market was unable to extend the dollar's gains scored in Asia and Europe in response to political developments in Japan and France. The Dollar Index reached almost 98.50 in Europe yesterday and retreated to almost 98.00 in North America. DXY is trading firmly today and is retesting yesterday's high in European turnover. A move above 98.60 could see 98.80-85 next. The dollar's gains seem to be more a function of political developments in Japan and the eurozone. President Trump is threating to fire thousands of federal government workers, but unions representing government workers have sought a court injunction against such a move, while holding out the possibility of talking with Democrats about health care subsidies. 

EURO: The euro held above the low recorded in late September near $1.1645 in yesterday's sell-off fanned by concerns about the brewing crisis in France. It recovered to around $1.1720 in North American turnover. but has been sold again today to about $1.1660. Options for 1.8 bln euros at $1.1650 expire today and another set there for about 1.7 bln euros expire Friday. A break of the $1.1645 low could spur a test on the $1.1600 area. President Macron's blunder of naming a new cabinet that looked too much like the previous one, seemingly ignoring power and threats of the opposition parties doomed the short-lived Lecornu government, which might not have survived a confidence vote later this week. It appears Macron has bought a little time, through Wednesday, but the die seems cast. Macron again faces three choices: appointing yet another prime minister, calling for a parliamentary election, resigning himself (which he has repeatedly ruled out). The deadline to file a regular budget is October 13. Without this in place, the government must rely on emergency measures to avoid a shutdown in January. The French 10-year premium over Germany widened to almost 90 bp, the most since December 2024. The French yield rose above Italy's. Separately, Moody's will announce the results of its review of the Aa3 (AA-) rating it ascribes to Belgium at the end of the week. It has a negative outlook. Separately, German reported disappointing August factory orders earlier today. They fell by 0.8% after falling 2.7% in July (revised from -2.9%). The median forecast in Bloomberg's survey was for a 1.2% increase. Industrial production is due tomorrow. It rose 1.3% in July and is expected to have contracted by 1% in August. Tomorrow, the German Economics Minister Reiche is expected to revise the government's economic projections to be more in line with German thinktanks:  0.2% GDP this year and 1.3% next year and 1.4% in 2027 (as infrastructure and defense spending kicks in). 

CNY: The dollar rose to the upper end of its recent range against the offshore yuan near CNH7.15 yesterday. Nearby resistance is seen around CNH7.1550. A move above there could target the CNH7.17 area. Mainland markets re-open Thursday. China reported a $16.5 bln increase in September reserves to $3.338 trillion. It bought gold for the 11th consecutive month: 40k troy ounces (~29166 troy ounces in a ton). 

JPY: In response to the anticipated policy mix of a new Japanese government, the dollar gapped higher and rose to a high near JPY150.50 before consolidating. Its gains were extended today to almost JPY150.85. The high since the end of Q1 was on August 1, near JPY150.90. Options for about $776 mln at JPY151.00 expire today. The (61.8%) retracement of this year's dollar decline is around JPY151.60. Earlier today, Japan reported August household spending rose by 2.3% in real terms, almost twice the median forecast in Bloomberg's survey. Spending was boosted by transportation and entertainment expenditures. In August 2024, household spending had fallen 1.9% year-over-year, and in August 2023, household spending was 2.5% lower on a year-over-year basis. Tomorrow, Japan sees labor earnings, which looks to have slowed, and the August current account, which likely expanded despite its trade deficit. Demand improved at today's 30-year bond auction, and the bid-cover was slightly above the 12-month average. Japan's long-term bond yields slipped a little today. 

GBP: Sterling continues to trade quietly. The UK economic calendar is light this week. UK Gilts underperformed yesterday but sterling avoided the turmoil that hit the euro and yen. It set a new session high in late North American turnover yesterday, near $1.3490. That held today and sterling slipped back to around $1.3430. Sterling continues to trade within the range set last Thursday (~$1.3400-$1.3510). A move above $1.3525 is constructive. It represents the (50%) retracement for the decline since the September 17 Fed rate cut. The next retracement (61.8%) is near $1.3570. The daily momentum indicators look poised to turn higher. 

CAD: The US dollar traded firmly yesterday against the Canadian dollar, though both the Australian and New Zealand dollars outperformed it. The greenback remains confined to the range set last Thursday (~CAD1.3935-CAD1.3985). Options for about $330 mln at $1.3975 expire tomorrow. Nearby resistance is seen from CAD1.3980 through CAD1.4020, which houses the 200-day moving average, the CAD1.4000 level that has held on a closing basis for almost six months, and the (38.2%) retracement of this year's decline. The shock to the Canadian economy this year has come from trade with the US. It will report its August merchandise trade balance tomorrow. Through July, Canada's trade deficit has averaged about C$3.5 bln. In the first seven months of 2024, the deficit averaged about C$500 mln a month. The IVEY purchasing managers’ survey also will be reported. It tends not to elicit much of a market response these days. The highlight of the week is the September jobs report on Friday. The median forecast in Bloomberg's survey is for the unemployment rate to tick up to a new cyclical high of 7.2%. Last September, Canada's unemployment rate was at 6.6%. The swaps market has about a 60% chance another rate cut later this month. It is fully discounted before the end of the year. 

AUD: The Australian dollar posted a bullish outside day yesterday; trading on both sides of last Friday's range and settling above it high (~$0.6615). Follow-through buying lifted the Aussie to almost $0.6625 before sellers took control and pushed it back to almost $0.6585. It remains within last Thursday's range (~0.6575-$0.6625). Last week's high was near $0.6630, and the (61.8%) retracement of the losses since the Fed's rate cut on September 17 is about $0.6635. A move above there targets the $0.6665 area. The year's high, set on September 17, was slightly above $0.6705. The daily momentum indicators look poised to turn higher. 

MXN: In its initial advance, the dollar rose to almost MXN18.49 but as its gains were pared in the North American morning yesterday, it was sold through the pre-weekend low (~MXN18.3675). It settled below last Friday's low, giving a bearish technical cast to the price action. It also settled below the 20-day moving average (~MXN 18.4040). It has not settled above the 20-day moving average in a month. However, the broad dollar gains today have seen it return to almost MXN18.39. Mexico reports September auto production and exports today. In August, Mexico produced almost 350k vehicles, slightly less than August 2024 (~352.6k). It exported almost 296.8k vehicles (84.8%). Domestic vehicle sales in September were about 117.2k. It was the second consecutive monthly decline but was about 0.3% higher than September 2024. 

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