Risk assets are starting the week on a positive note as the US and China agree on issues like TikTok sales, soybean purchases, and tariffs. A meeting between US President Donald Trump and China’s President Xi Jinping could lead to a formal agreement, postponing the severe mutual tariffs of 125-145% that were previously threatened. The ongoing government shutdown has caused a lack of US data releases. Markets are closely watching China’s planned export controls on rare earths. A delay of a year could boost global equity markets. Consequently, the Australian and New Zealand dollars are rising, while the US dollar may struggle if the US-China talks yield positive results.

Federal Reserve Chair Shortlist

Scott Bessent has shared a shortlist for the next Federal Reserve Chair, including Rick Rieder. The government shutdown has led to few data releases, with a 49% chance it could extend beyond November 16. This is critical since the US military may not receive pay if the shutdown lasts past November 15. Currently, the Dollar Index (DXY) is around 99, with possible changes influenced by local politics and key economic indicators like the German Ifo. Risk assets are gaining traction this week as hopes rise that US-China trade talks will reduce tensions. We recall the market chaos that followed threats of 125-145% tariffs during the Trump administration. A formal agreement now, either to delay new tariffs or roll back existing ones, could trigger a significant rally in global stock markets. This optimism might put pressure on the US dollar as interest in emerging market assets grows. In fact, major emerging market ETFs have already attracted over $10 billion in net inflows this quarter, indicating that traders are betting on a weaker dollar. A favorable outcome from the trade talks would likely boost this trend, benefiting risk-sensitive currencies.

Domestic Risks and Federal Reserve Meeting

The Dollar Index (DXY) is currently near 106.50, but a breakthrough in trade talks could push it down to support around 105. We saw similar trends in the late 2010s when positive trade news caused the index to drop quickly from about 99. Options traders might consider buying put options on the dollar as a hedge against a sudden market shift. A significant domestic risk is the upcoming government funding deadline on November 21. Political betting markets indicate a 30% chance of a brief shutdown. If Congress fails to pass a funding resolution, it could lead to short-term volatility and a rush to safe assets, which may temporarily strengthen the dollar. Looking beyond geopolitical issues, we are focused on the Federal Reserve’s meeting next week. Futures markets, as indicated by the CME FedWatch Tool, are predicting an 85% chance that the Fed will keep interest rates unchanged. This means the real risk for derivatives traders stems more from unexpected hawkish language in the Fed’s statement rather than an actual change in rates. Create your live VT Markets account and start trading now.

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