Dollar maintains gains amidst fragile market conditions

Important data week, Alphabet reports today

Market participants are gradually preparing for an action-packed week, with Friday’s US jobs report being the key event, that also includes some major earnings releases. Alphabet will report today, followed by Microsoft and Meta tomorrow, and Amazon and Apple on Thursday.

But the market’s mind is mostly on next week’s calendar. The outcome of the November 5 US presidential election will have repercussions far and wide, starting with the Fed meeting on November 7. The market remains very confident about a 25bps rate cut announcement next week, though there is still considerable time for conditions to dramatically change until the Fed gathering.

For example, the most confusing scenario for the next two weeks is the US data finally starting to show signs of weakness such as a sub-100k nonfarm payrolls figure, earnings results being spectacular, confirming that the age of AI has commenced, and former President Trump winning the US election.

In this scenario, and since the market is relatively convinced that Trump’s new tenure could resemble his nearly chaotic first term, risk sentiment could take a significant hit, with the Fed left to decide between supporting the stock markets and the economy, and preparing for a potential barrage of protectionism acts, like tariffs, that could significantly boost inflation.

US yields and gold remain high

Regardless of next week’s election outcome, the bond market is sounding the alarm, as the 10-year US Treasury yield is hovering a tad below 4.3%. This level looks incompatible with the current Fed stance, but US debt is ballooning, and the next US president will face a humongous task to sort out the country’s fiscal position.

This could be one of the reasons for the ongoing gold rally. It is edging higher again today, just a tad below its recent all-time high of $2,758, with demand expected to remain potent going into next week. On the flip side, oil is hovering near its early September lows, quickly dropping from the October 8 peak of $78.96. 

Bitcoin seems to be one of the few assets enjoying the current period, as it is trading at the highest level since early June. The pre-election rhetoric seems to be boosting demand for the king of cryptos, with fear of missing out (FOMO) on a significant post-election rally potentially playing a key role as well.

The yen could suffer further

These moves come as the dollar is maintaining its recent gains against both the euro and the yen. Japan’s LDP party chief Ishiba is trying to find a solution following Sunday’s disastrous results. The main scenario is that another coalition partner is found, but these negotiations could take a while. Thoughts about a minority government could quickly result in the dissolution of the new parliament and fresh elections, putting Ishiba out of the picture.

The end product is that the BoJ will find it even more difficult to hike this week or in December. The DPP party head, the rumoured partner for LDP’s new coalition government, has already stated that “the BOJ should avoid making big policy changes now because real wages are still at a standing”. This means that the yen is gradually losing its main tailwind against both the dollar and the euro.