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Overview: The US dollar is mostly firmer today as its pullback from last week's highs is retraced. Although the US 10-year yield is spending more time below the 4.0% floor, the yen is the weakest of the G10 currencies, off about 0.70%, as Takaichi became Japan's first woman prime minister and the many investors are concerned about the policy mix she advocates. That said, the JGB market was little changed. Most emerging market currencies are also softer. The Chinese yuan's nearly flat performance puts it atop the EM FX complex, pending the open of the Latam market. 

Gold rallied almost 2.5% yesterday to reach a new record (~$4381.50) but is off nearly 2% now. It is thus far holding above yesterday's low (~$4219). December WTI is consolidating after recovering from slightly below $56 to a little above $57. It reached almost $57.30 today. Asia Pacific equities advanced after yesterday's rally on Wall Street. China's CSI 300 was the strongest, with a 1.5% advance. After rallying 1% yesterday, the Stoxx 600 in little changed in the European morning and US index futures are slightly softer. European 10-year yields are marginally lower, and the US 10-year Treasury yield is nearly a basis point weaker near 3.97%. Last week's low was about 3.93% and the low for the year, set around "Liberation Day" was almost 3.85%. 

USD: After falling by a little more than 0.5% last week, the Dollar Index is consolidating. It has approached the (61.8%) retracement of last week's losses as it nears 98.90 in the European morning. Last week's high was slightly shy of 99.50. Hassett, the director of National Economic Council, told a CNBC audience yesterday that the government shutdown is likely to end sometime this week. The market is skeptical. Meanwhile, today the Philadelphia Fed's October non-manufacturing survey is due. It stood at -12.3 in September. It has been contracting this year, and in fact, was positive only once last year (October 2024 it was at 1.5). Recall that the October Philadelphia Fed's factory survey saw the business outlook plunge from 23.2 in September to -12.8 in October. It was the weakest reading since April. non-manufacturing survey results will be reported. It stood at -12.3 in September. It has been contracting this year, and in fact, was positive only once last year (October 2024 it was at 1.5). The highlight of the week is Friday's CPI. The median forecast in Bloomberg's survey is for a 0.4% increase in the headline rate and 0.3% in the core rate. This will lift the year-over-year headline rate for the fifth consecutive month to 3.1% (from 2.9%). It was at 2.4% in September 2024. The rate is likely to be steady at 3.1% for the third consecutive month. It was at 3.3% in September 2024. This illustrates the general rule of thumb and why the Fed talks about core inflation. The headline pace typically converges with the core measure rather than the other way around. Still, indicative pricing of derivatives shows the market is confident of a rate cut next week and another one before the end of the year. 

EURO: The euro bounced from a little below $1.1545 to almost $1.1730 last week. It settled near its session lows before the weekend and slipped a little further yesterday (to ~$1.1640). The euro's losses extended slightly past the (61.8%) retracement, near $1.1615, which is also where the downtrend line drawn off the September 17 multi-year high (~$1.1920) and the early October highs (~$1.1780 and $1.1760) is found today. Options for 960 mln euros at $1.1600 expire today. A break could signal a return to last week's low. The eurozone economic diary is light until the preliminary October PMI at the end of the week. It is expected to be little changed. 

CNY: The dollar appears to be in a consolidative phase against the yuan. It frayed the lower end before last weekend, slipping a little below CNH7.1170. The losses were extended to almost CNH7.1160 today before recovering to around CNH7.1220. The PBOC raised the dollar's reference rate yesterday (CNY7.0973 vs. CNY7.0948 before the weekend) for the first time in four sessions. It was set at a new low for the year today at CNY7.0930. It has not been set below CNY7.09 since the middle of October 2024. Note that last week, the World Bank raised its forecast for China's growth this year to 4.8% from 4.0% in April. Several banks have followed suit.

JPY: The dollar reached an eight-month high on October 9-10 around JPY153.25. It was sold slightly through JPY149.40 ahead of last weekend before recovering to almost JPY150.65. The greenback was bid to JPY151.20 yesterday and stalled in front of the (50%) retracement of the pullback (~JPY151.35). It took that out today and rose to slightly above  JPY151.80, to meet the (61.8%) retracement. About $465 mln in options struck at JPY152 expire today. Last week's high was near JPY152.60. The new LDP-Ishin alliance falls two seats shy of a majority in the Diet but LDP's Takaichi became the new prime minister earlier today. That said, the alliance has not agreed on Ishin's call for a temporary cut in the sales tax on food or stricter rules on political funding. A discussion forum will be created, with the goal of a decision by the end of September 2027, when Takaichi's current term as LDP leader ends. There was agreement on national security issues and reducing the number of seats in the lower chamber (10%), and reform in the social welfare on employees. Ishin, based in Osaka, reduced the number of seats in the local government to 79 from 109. Both parties are also committed restoring nuclear power. 

GBP: Sterling has gone nowhere in the past three sessions but is breaking down today. It recovered from last Tuesday’s three-and-a-half-month low near $1.3250. It reached $1.3455 last Thursday, and $1.3470 ahead of the weekend, before pulling back to settled slightly above $1.3425. Sterling was roughly $1.3400-45 range yesterday. It has been sold to a four-day low near $1.3370. The (50%) retracement of last week's bounce is around $1.3360 and the (61.8%) retracement is about $1.3335. Earlier today, the UK reported its public finances and that take away the deficit edged up in September to GBP20.2 bln from GBP18.26 bln in September 2024 and GBP14.62 bln in September 2023. The year-to-date overshoot of the OBR projections is about GBP7.2 bln, less than the GBP11.4 bln overshoot in August. Tomorrow, September CPI is due. Given the base effect, a 0.1% increase would lift the year-over-year rate to 4.0% (from 3.8% in August). The core rate is expected to edge up to 3.7% (from 3.6%), with service prices creeping up to 4.8% from 4.7%. The Bank of England meets next week and the swaps market is discounting slightly less than a 13% chance of a cut and around 40% of a cut before year end.

CAD: The greenback reached a six-month high last Tuesday near CAD1.4080. It has been consolidating in recent days. It slipped to a five-day low yesterday but held support in front of CAD1.4000. The daily momentum indicators are stretched but have not turned lower. A move above last week's high could see a push above CAD1.4100. We have suggested risk into the CAD1.4150-65 area. Canada reports September CPI today. The headline is expected to fall by 0.1% for the second consecutive month, but given the base effect, the year-over-year rate would edge up to 2.2% from 1.9%. That would be the highest since the end of Q1. The underlying core rates look largely flat around 3.0%. Bank of Canada officials have been downplaying the significance of the underlying core measures. Officials estimate underlying inflation is closer to 2.5%. The implication is that the inflation report will not deter the central bank from cutting rates next week. The swaps market is discounting almost an 85% chance of a cut. The odds have increased steadily since last Monday when 40% chance was discounted, as the market shrugged off the policy-impact of the stronger-than-expected employment report. 

AUD: The Australian dollar extended its recover that began before the weekend. After briefly dipping below $0.6450 last Friday, it settled near $0.6500. It rose to $0.6515 yesterday. It initially extended the gains to $0.6525 today, stopping ahead of last week's high, around $0.6535. Options for about A$335 mln at $0.6530 expire today. It has reversed lower and is threatening yesterday's lows near $0.6475, which corresponds to the (61.8%) retracement of last week's recovery. Adding to the selling pressure may be the nearly A$500 mln options at $0.6500 that also expire today. Australia's Prime Minister Albanese met with President Trump yesterday. The possibility of cooperating more in the rare earth’s space captured the imagination of some equity traders. Trump also endorsed the AUKUS submarine deal. Australia's economic diary is empty until the preliminary October PMI at the end of the week.

MXN: The dollar slipped to a marginal new seven-day low yesterday near MXN18.3525. Within the consolidative range, the dollar snapped a three-day decline to post a minor gain. The dollar is trading above yesterday's high (~MXN18.42). Last week's high was closer to MXN18.63, and the high for the month was a little higher, near MXN18.6370. Recent floods in Mexico may pose a challenge for President Sheinbaum. A disaster fund was cut by her predecessor AMLO. Mexico's economic diary picks up starting with tomorrow's August IGAE economic report, which acts like a monthly GDP. It has been alternating monthly between rises and falls since February. It fell by 0.89 in July, the largest decline this year. Through July, it averaged 0.05 this year after 0.14 in the first seven months of 2024. August retail sales and inflation for the first half of October will be reported Thursday. Meanwhile, the heightened tensions between the US and Colombia pressured the currency (-0.90%), ending a three-day rally and a 2.3% gain last week. Its 10-year dollar bond yield also rose (almost two basis points to near 6.80%). Mexico and Brazil's comparable yields softened a little. The dollar rose against the Argentine peso yesterday to a new high (~ARS1477.39) though the 10-year dollar-yield fell in response to the government's announcement of a bond-buyback program after close of the fx market. 

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