TSX jumps amid Fed rate cut hopes, ongoing U.S. government shutdown
Financial market volatility is falling across the board, partly driven by the US government shutdown and the delay to key data releases such as the September jobs data. Instead, investors remain transfixed by the AI-driven rally in megacap tech shares, which shows no signs of slowing. Today, look out for US ISM services data, Fed speakers and Turkish CPI
USD: We’ll Still See ISM Services
Traded volatility is falling across financial markets. Investors have settled into the view that the Fed will likely cut rates twice more this year and probably another 50bp in 2026. The US interest rate volatility – so often the driver of volatility in other asset classes – is just not here at the moment.
And the delay in big US data releases, such as today’s US jobs report, further postpones forming a clear view on the friction between sticky inflation and a softening labour market. Instead, the world is left to watch in wonder at the ongoing AI rally. The latest news is that OpenAI is being given a valuation of close to $500bn in its latest funding round – compared to $300bn earlier this year.
Low volatility means continued interest in the FX carry trade, where the USD/TRY remains very popular (see below). There also remains a strong interest in the Egyptian pound, which continues to rally despite another 100bp rate cut yesterday. Hungary’s forint also remains a recipient of carry trade inflows.
The DXY US dollar index has ground to a halt near 98. We doubt today’s release of the September ISM services data will have much impact. We also have an array of central bank speakers at Klaas Knot’s farewell symposium in Amsterdam – including the Fed’s John Williams.
Additionally, we will hear from Fed superdove, Stephen Miran, twice today. The debate over the next Fed chair has taken a backseat for the time being, but will return. Current betting odds show the favourites as Christopher Waller (12%), Kevin Warsh (10%) and Kevin Hassett (9%).
There are also a couple of weekend event risks for traders to consider. The Japanese LDP leadership election result should be announced tomorrow, where Sanae Takaichi would be seen as more yen bearish than Shinjiro Koizumi. And a Bank of Japan hike is still priced at 60% for the end of the month. We think the yen is undervalued and should meet good buying on any dips. And the weekend also sees an OPEC+ meeting, with risks of a higher supply increase as the Saudis try to reclaim market share. Lower oil prices are a US dollar negative.
EUR: Lower Energy Prices Are Good News
EUR/USD remains glued to the 1.1700 area. Three-month traded volatility has dropped to its lowest level since last November, at 6.60%. Interestingly, the three-month risk reversal skew in the EUR/USD FX options market remains at 0.5% in favour of euro calls. So, it’s not as though investors have given up on the EUR/USD upside; it’s more that they think there will be less volatility in general.
As above, lower energy prices are good news for the euro. The euro’s terms of trade (export less import prices) are towards the higher levels of the year as both crude oil and natural gas prices soften. This will help the euro’s valuation metrics.
For today, there’s little eurozone data of note, but we do hear from ECB speakers Lagarde, Schnabel and Wunsch. The ECB script at the moment remains one of the 2.00% deposit rate being at a good place, but that the central bank would not hesitate to act if needed. That threat to act probably means one further rate cut should inflation undershoot at a time of weak activity. However, the market struggles to price another 25bp cut in this cycle.
It’s hard to see EUR/USD moving out of a 1.1700-1750 range today.
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