The US Dollar (USD) is slightly up as the week wraps up, while the Euro sees a small gain. The AUD and NZD are lagging due to weaker-than-expected Chinese Manufacturing PMI data, which has negatively affected local stocks. Despite some positive news in trade and monetary policy, the DXY index is having a tough time moving past the mid-99 range. There isn’t a clear theme in the market, which has prevented the USD from gaining consistent momentum. Its connections to factors like risk, volatility, and yields are also weak.

US Government Shutdown

The US government shutdown is now on Day 31, breaking the previous record of 35 days. This situation has led to the delay of important data releases, such as Personal Income, Spending, and PCE data. It’s unclear when the shutdown will end, though the Chicago PMI report is expected soon. With the Federal Reserve’s quiet period ending, we might see some Fed officials speaking on television. As we close the month, the US Dollar remains steady but is having a hard time gaining new momentum. The Dollar Index (DXY) has struggled to break above the 107.00 resistance level this week, indicating buyer fatigue. The AUD has weakened after the latest Caixin Manufacturing PMI for October dropped to 49.8, just below the growth mark. The market seems to lack a main theme to push the dollar in one clear direction. The relationship between the DXY and classic risk indicators, like the VIX index, has significantly weakened this past month. How the last week of October concludes will be crucial in determining if there’s enough strength for a rise into November. If we look back at the dollar’s performance from 2022-2023, we see a similar pattern. A strong dollar often peaks and is followed by a long period of consolidation and decline. The current stabilization since this summer feels much the same and suggests that the rebound might be running out of energy soon.

Impact On Derivatives Trading

The current US government shutdown, now at 36 days, adds a significant layer of uncertainty. It has officially surpassed the previous shutdown that lasted 35 days in 2018-2019, making it the longest on record. As a result, we are missing key data points like the Personal Consumption Expenditures (PCE) report, which was expected this morning and provides crucial insights into inflation. For traders in derivatives, this situation suggests shifting away from bets that anticipate continued dollar strength. With the DXY struggling at the 107.00 mark, buying put options or establishing put spreads on the dollar could be a smart strategy to hedge against or to prepare for a possible decline. Implied volatility on major currency pairs has risen to an average of 8.5% this week, reflecting the increasing uncertainty from the shutdown. This makes strategies that benefit from price fluctuations, such as straddles, more appealing. Create your live VT Markets account and start trading now.

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