The US Dollar Index jumped to 98.85 due to excitement over a possible trade deal between the US and China. President Trump shared news of a meeting with Chinese Prime Minister Xi Jinping, expressing hope for a “fair deal” that could ease trade tensions. Meanwhile, White House economic advisor Kevin Hassett suggested that the government’s ongoing shutdown, now in its fourth week, may end soon, which could also boost the dollar.

Market Sentiment and USD Index

The USD Index measures the dollar against six major currencies and is benefiting from positive market sentiment. The prospect of resolving the US-China trade conflict, which started in 2018 due to tariffs and trade barriers, is improving confidence. This conflict returned with Donald Trump’s presidency, which brought proposed 60% tariffs on China and new worries about potential global economic issues similar to those experienced before the pandemic. Statistics Canada is set to release inflation data for September, providing crucial information for the Bank of Canada’s next interest rate decision. The Bank of Canada is expected to cut rates by 25 basis points. Additionally, PancakeSwap’s CAKE token is under pressure as investors take profits, causing its price to drop below $2.90, while major stakeholders are reducing their holdings. With the US Dollar Index nearing 98.85, we are witnessing a typical relief rally fueled by hopes for a US-China trade deal. However, these gains rely on discussions, not an official agreement, especially after the 60% tariffs introduced in January. Thus, the strength of the dollar may be fragile ahead of next week’s meeting between the two leaders. The market’s fear gauge, the VIX index, has fallen below 20 for the first time in a month, down from nearly 30 when tariff impacts were factored in. This decrease in implied volatility makes it cheaper to buy protection. It might be a good time to consider purchasing put options on stock indices as insurance in case the trade talks go poorly. We remember that the previous trade war, escalating through 2018 and 2019, was estimated by the IMF to reduce global GDP by 0.8%. Given that the current tariffs are significantly higher, the market may be underestimating the risks if no deal is reached. The current optimism feels out of touch with the economic downturn reflected in supply chain data over the last nine months.

Government Shutdown and Economic Data

The ongoing government shutdown adds more uncertainty, leaving both the public and the Federal Reserve without important economic data. This situation resembles the 35-day shutdown we faced in late 2018, which delayed key reports and made it hard to predict Fed policy. Without fresh employment or inflation data, any Fed statements next week will be based on incomplete information. Today’s Canadian inflation data presents a trading opportunity. The market expects the Bank of Canada to cut rates by 25 basis points on October 29, but Statistics Canada just reported a surprising annual inflation rate of 3.1% for September. This persistent inflation may compel the central bank to hold rates steady, which would likely strengthen the Canadian dollar. This scenario supports trades that would benefit from a hawkish surprise from the Bank of Canada, such as buying call options on the Canadian dollar or selling the USD/CAD currency pair. The difference between a data-blind Fed and a Canadian central bank facing ongoing inflation may shape currency movements in the coming weeks. Create your live VT Markets account and start trading now.

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