Mexico’s inflation rate in September was 0.23%, slightly below the expected 0.27%. This small difference indicates a slight shift from what the market predicted. In other financial news, the Dow Jones Industrial Average dropped because of ongoing government shutdown concerns. The USD/JPY stabilized around 153.00, while the Australian dollar weakened as the US dollar gained strength.

Currency and Commodity Movements

The EUR/USD faced a decline, hitting a nine-week low between 1.1550 and 1.1540, while GBP/USD fell below 1.3300, reaching multi-week lows. Gold also dipped, trading under $4,000 as market uncertainties linger. In the cryptocurrency market, Bitcoin dropped to nearly $121,000, and Ethereum and Ripple also declined. On the other hand, Zcash has rallied for the second time, indicating a growing interest in privacy protocols. US tariffs are a crucial element of American foreign policy, repeatedly emphasized by the government. This keeps tariffs as a key policy tool, regardless of daily news updates. With a risk-off sentiment prevailing, many are moving towards safer investments amid the ongoing US government shutdown. The US Dollar Index (DXY) has surged past 108 for the first time since last year, showing a high demand for cash. Historically, as seen during the 2018-2019 shutdown, the dollar tends to strengthen during times of domestic uncertainty.

Impact of Dollar Strength

The strength of the dollar is causing major currency pairs to shift. EUR/USD has reached a nine-week low near 1.1540, and GBP/USD has dipped below 1.3300. The Federal Reserve’s hawkish outlook, highlighted by recent comments about “significant risks” to its inflation target, is fueling this trend. September’s US Consumer Price Index showed core inflation at 3.8%, giving the Fed little reason to change its approach. In Mexico, the inflation data presents a complex picture for the peso. The September inflation rate of 0.23% was below expectations, which might lead Banxico to pause its rate hikes, keeping the overnight rate steady at 10.5% for two consecutive meetings. This difference in monetary policy makes holding long US dollar positions against the peso more appealing. Gold is in a tricky spot, falling from above $4,000 to about $3,950. Although uncertainty usually boosts gold prices, the strong demand for US dollars is putting pressure on the precious metal. This situation appears to be a liquidity squeeze where traders are selling assets, including gold, to generate cash. Risk aversion is evident in equity markets, with the Dow Jones Industrial Average declining. The CBOE Volatility Index (VIX), known as the market’s “fear gauge,” has risen to 24, indicating significant investor concern. Derivative traders should expect continued volatility as the shutdown continues. In the cryptocurrency world, there is widespread profit-taking as traders shift away from high-risk assets. Bitcoin has corrected to around $121,000, with other major tokens following suit, echoing trends from previous risk-off cycles. This suggests that digital assets are still seen as high-risk investments rather than safe havens. In this environment, purchasing put options on currency pairs like AUD/USD or equity indices like the S&P 500 could offer effective downside protection. The elevated VIX means option premiums are higher, but they provide a defined-risk method for positioning against further market declines. Long US dollar positions through futures contracts seem well-supported as well. For those interested in relative value trades, the contrast between a hawkish Fed and a possibly pausing Banxico presents opportunities. Shorting Mexican peso futures while remaining long on US dollar index futures could effectively capitalize on this policy difference. Additionally, it may be wise to hedge remaining equity exposure by selling E-mini S&P 500 futures until the US political situation stabilizes. Create your live VT Markets account and start trading now.

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