• Liquidity Risks for USD: As the U.S. election approaches, concerns about liquidity tightening may drive deleveraging in currency markets, with the USD and other liquid currencies (EUR, CHF, GBP) outperforming more vulnerable ones (AUD, NZD, NOK, SEK).
• JPY Under Pressure: The yen faces domestic headwinds following a political shift in Japan, with speculative shorting rising. Intervention may occur if the USD/JPY rally continues, especially before upcoming Bank of Japan and U.S. election events.
• U.S. Economic Indicators: Today’s JOLTS job openings, along with consumer confidence and wholesale inventories, are in focus. Lack of a job market slowdown could further support USD strength driven by election-related hedges.
• EUR Buoyed by Liquidity: The euro benefits from unwinding in Nordic currencies and recent hawkish comments from ECB’s Guindos, though broader EUR trends remain dovish with continued downside pressure against USD.
• GBP Awaits Budget Impact: GBP/USD could be vulnerable ahead of tomorrow’s UK Budget and next week’s U.S. election. Despite heavy long positions in GBP, no risk premium is currently priced in, which could shift if market reactions to the Budget are negative.

USD: Market Liquidity and Election Pressures Begin to Stir

In our recent FX-U.S. election analysis, we highlighted a potential liquidity crunch approaching November 5, with the high-stakes election outcome possibly prompting market-wide deleveraging in currencies. Since the weekend, G10 currency trends suggest that liquidity issues, alongside heightened hedging against Trump-related volatility, are steering FX dynamics. The more liquid and less Trump-sensitive currencies (USD, EUR, CHF, and GBP) are performing well, outpacing currencies that are less liquid and more vulnerable to protectionist policies (AUD, NZD, NOK, and SEK). This trend is likely to persist in the days ahead.

Meanwhile, the yen is emerging as an outlier, strongly impacted by domestic developments. Speculative shorts on JPY are climbing after the ruling coalition lost its parliamentary majority, and attention is shifting to where authorities may intervene to curb the USD/JPY rally. While Japan’s Finance Ministry may not set a strict level (like 155.0) to halt the rally, they may take advantage of market conditions to act. With elevated short-term risks, JPY could see further selling ahead of Thursday’s Bank of Japan meeting and next week’s U.S. election.

On the U.S. economic front, the release of September’s JOLTS job openings today might shift market attention from election-related trades. Recent hawkish signals in USD swap curve pricing could only be reversed by evidence of job market softening. Expectations for today’s report are that openings will remain stable at 8.0 million. Additionally, the Conference Board Consumer Confidence index for October and September’s wholesale inventories are on today’s calendar.

A stable U.S. macro picture this week could support further dollar gains driven by election hedges and general deleveraging. We maintain a positive bias for the dollar and could see the DXY index near 105.0 on Election Day.

EUR: Benefiting from Liquidity Squeeze in Less Liquid Currencies

As noted in the USD section, liquidity strains are helping the euro, particularly in cross-pairs. Some of this support stems from unwinding positions in Nordic currencies, which are often traded against the euro. We’re watching NOK closely, as it typically reflects FX liquidity conditions.

Domestically, ECB’s Luis de Guindos’ unexpectedly hawkish comments highlighted substantial risks to the inflation outlook, drawing attention away from growth concerns. Although these comments alone won’t overturn the broader dovish tilt in the EUR market, the USD

two-year swap rate spread remains near its widest since April at 160bp. This still signals potential downside pressure for EUR/USD, even though short-term risks are now more balanced.

GBP: Holding Steady Ahead of the UK Budget

Sterling is in wait-and-see mode ahead of tomorrow’s Budget from Chancellor Rachel Reeves. Two technical factors could influence any negative market reaction for GBP.

First, political risk isn’t currently priced into sterling, with short-term EUR/GBP fair value standing around 0.834. Historically, periods of UK political or gilt-market turmoil have added a risk premium of 3-5% in EUR/GBP.

Secondly, recent CFTC data shows speculators heavily favoring the pound, with net-long GBP positions the largest in G10 at 32% of open interest as of October 22. This has remained resilient against the broader shift back into USD seen in other developed currencies.

As a result, GBP/USD could see downside pressure leading up to the Budget and the U.S. election next week, with potential movement toward 1.2800-1.2850.