The Morning Update

The USD edged lower, oil prices firmed, equities advanced, and U.S. yields climbed as markets weighed the ongoing government shutdown alongside optimism from the AI-driven rally. The U.S. dollar is heading for its worst week since July, pressured by the government shutdown that has disrupted key data releases and fuelled uncertainty over the Fed’s next steps. The yen remains underpinned by caution from the Bank of Japan, while markets still see an 89% chance of a Fed rate cut in December, keeping traders wary of further dollar weakness. Global equities extended their rally as a wave of artificial intelligence partnerships and deals fuelled optimism, with Asian tech shares leading the way after tie-ups between Hitachi and OpenAI, as well as Fujitsu and Nvidia. U.S. futures pointed higher, with the S&P 500 and Nasdaq 100 on track for their longest winning streaks since July, while Europe’s Stoxx 600 extended record gains led by miners. Investors appear unfazed by the U.S. government shutdown and the absence of economic data, focusing instead on the AI-driven momentum and expectations of easier monetary policy. “Financial market volatility is falling across the board, partly driven by the US government shutdown and the delay to key data releases such as the September jobs data,” wrote ING strategists Chris Turner and Francesco Pesole. “Instead, investors remain transfixed by the AI-driven rally in megacap tech shares, which shows no signs of slowing.” Elsewhere, Oil prices held firm despite pressure from expectations of higher OPEC+ output, while gold strengthened and is on track for its seventh straight weekly gain. Bitcoin slipped but remained above the $120,000 level, with traders still eyeing further upside potential. With the absence of some key US economic data, investors will focus on the US ISM Service PMI, as well as speeches from ECB President Lagarde, BoE Governor Bailey, and Fed Governor Williams, to provide direction to currency markets.

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In the news. The US Energy Department cancels billions of green projects in blue states. Stock futures rise with Wall Street set for strong gains even as shutdown grinds on. Putin warns of 'new stage of escalation' if the US supplies long-range missiles to Ukraine. Hitachi shares soar over 10% on partnership with OpenAI. The US brushes off the Chinese warning to the Hong Kong consul general. Massive fire erupts in jet fuel unit at Chevron's Los Angeles refinery. BlackRock nears $40 billion data centre deal in bet on AI. Democrats dismiss Trump's firing threats as the US shutdown drags on. Canada announces the Defence Investment Agency to manage the purchase and delivery of military equipment.

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In currency markets. The Japanese yen has firmed against the dollar due to safe-haven buying and speculation that the Bank of Japan may adopt a more hawkish stance. The South African rand is also higher, supported by rising gold prices and weakening dollar momentum. The Norwegian krone increased slightly as energy markets stabilized, adding pressure on the greenback. CNY and Asian currencies are generally flat against the USD. Trading currencies are mostly quiet, with CHF and KWD flat, JPY, AUD, DKK and CZK are up 0.1%, MXN, NZD, SEK, NOK, and ZAR have gained 0.25% against the USD.

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In commodity markets. Oil prices are up 0.7%. Natural Gas, Wheat and Soybean prices are down 0.25%. Copper prices strengthened by 1.2%, Gold prices gained by 0.5%, while Silver and Coffee prices rallied by 1.9%.

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CAD is nearing five-month lows but continues to hold just below 1.4000 against the U.S. dollar, pressured by weaker oil prices and uncertainty around upcoming USMCA trade negotiations. With little fresh Canadian or U.S. data and the U.S. government shutdown limiting visibility, the loonie remains vulnerable to broader market sentiment. A Reuters poll points to potential recovery over the next year as Fed rate cuts weigh on the greenback, while the Bank of Canada is expected to deliver only one more cut after last month’s move to 2.50%. Gold’s rally has offered some support, though persistent trade risks and commodity volatility continue to limit upside momentum.

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EURCAD has extended its rally, up 2% over the past month and 10% over the last year, testing highs not seen since 2009 when the pair reached 1.6942. The Canadian dollar remains under pressure as the Bank of Canada continues its easing cycle and signals openness to further cuts if risks mount. Meanwhile, the European Central Bank has held rates steady, constrained by persistent inflation and a cautious policy stance. This divergence between a dovish BoC and a more cautious ECB maintains upward momentum in EUR/CAD.

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EUR edges higher but stalls below 1.1750, as the ongoing U.S. government shutdown and resulting data blackout continue to put pressure on the dollar. The rally is underpinned by growing expectations that the Fed will cut rates, though caution from some Fed officials is tempering exuberance. Mixed Eurozone data and soft sentiment are constraining further gains in the euro. All eyes are on ECB President Lagarde, who is expected to reinforce the bank’s cautious stance. The upcoming U.S. ISM Service PMI and Fed Williams comments will also provide some direction for the USD.

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GBPEUR is holding steady in a range-bound trade, with limited volatility as investors weigh diverging economic outlooks between the UK and the Eurozone. Analysts note that recent signals from the BoE and ECB have anchored sentiment, leaving the pair without strong directional drivers for now.

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GBP remains steady, straddling 1.3450, with markets navigating through the U.S. shutdown and a lack of fresh data. The BoE’s DMP survey highlighted weakened hiring expectations from UK firms, raising questions about the strength of the labour market. Divergent views among BoE officials on inflation add to uncertainty, but attention is on today’s comments from Governor Bailey, who’s expected to signal that the Bank will stay vigilant and potentially delay rate cuts if inflation remains sticky. The combination of labour weakness and policy caution may cap GBP’s upside in the short term.

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