Eerie Calm in the Foreign Exchange Market

[Redator]

Overview: The foreign exchange market is quiet, and the US dollar is slightly softer against most of the G10 currencies, though the Australian and Canadian dollar are struggling. Most emerging market currencies are also firmer. The market seems optimistic that the US-China trade tensions can de-escalate with Beijing re-assigning Li Chenggang who apparently annoyed the US and was called out by US Treasury Secretary Bessent. China's Q3 GDP was broadly in line with expectations with a 1.1% quarterly advance that saw the first decline in non-property investment since the pandemic. 

Benchmark 10-year yields are mostly higher today. France was downgraded by S&P before the weekend and its 10-year yield is up 2-3 bp today, while the rest of the eurozone yields are half as much, including Italy, which was upgraded. The 10-year US Treasury yield is firmer but around 4.01% is still its trough. Equities are in rally-mode. A new alliance in Japan means that the LDP's Takaichi will be the next prime minister. The Nikkei rally nearly 3.4%. Mainland companies that trade in Hong Kong saw their shares jump 2.45%. Taiwan and South Korea indices rally 1.4%-1.7%. Europe's Stoxx 600, which lost nearly 1% before the weekend, is up nearly 0.65% in later morning turnover. US index futures are extending their pre-weekend gains. Gold stabilized. After dumping nearly 1.75% before the weekend, it is up about 0.25% to around $4262, having been up to $4275 earlier today. December WTI is little changed in about a $0.40 range on either side of $57. 

 

USD: The Dollar Index recovered from a push to almost 98.00 before the weekend to 98.55 and slightly above 98.65 today. The (50%) retracement of last week's losses is around 98.75. President Trump has made three demands as talks with China continue ahead of the 100% tariff he threatened ahead of the November 10 end of the current "trade truce". These include not using its rare earths leverage against the US, for Beijing to buy US soybeans, and to stop fentanyl. Meanwhile, the absence of government data continues to be felt, and especially now as Fed officials enter a communications blackout period ahead of next week's FOMC meeting. The market, judging by the pricing in the Fed funds futures, is confident of a rate cut and one more before the end of the year. Tomorrow, the Philadelphia Fed non-manufacturing survey is due. Recall that its manufacturing survey jumped to 10.7 from -8.7. The highlight of the week is the September CPI. An exception had been made for its importance in setting the cost-of-living adjustments, including Social Security. The headline rate is expected to rise to 3.1% (from 2.9%). The last time the year-over-year rate fell was April. The core rate is expected to be steady at 3.1%. 

EURO: The euro was turned back from almost $1.1725, its best level in more than a week, before the weekend as US stocks stabilized and a few regional banks’ earnings were embraced by the market. It is pinned in a narrow range, a little less than a quarter of a cent below $1.1675 and holding (albeit barely) above last Friday's lows. Initial support may be in the $1.1630-40 area. EMU reported an11.9 bln euro current account surplus in August, the smallest since April 2023. It was 23.3 bln euros in August 2024. The year-to-date current account surplus is a little less than 200 bln euros. In the year-ago period, it was almost 295 bln euros. Even if one knew the direction of the current account balance would move, it would not have helped anticipate the euro's appreciation this year. The ECB expects the euro area's current account surplus to edge down to 2.4% of GDP this year from 2.7% in 2024. It forecasts a 2.5% surplus in 2026 and 2027. 

CNY: The dollar traded on both sides of Thursday's range against the offshore yuan ahead of the weekend but settled well within its range. The CNH7.12-CNH7.15 range was frayed a little at the ne end of the week on an intraday basis but still remained intact on a settlement basis. The greenback has been confined to a narrow range between about CNH7.1225-CNH7.1290 today. The PBOC set the dollar's reference rate lower in the last three sessions last week and Friday's was set at a new low for the year (CNY7.0949). Today's was set at CNY7.0973. Today is an important political and economic day in China. The Fourth Plenary Session of the Chinese Communist Party began. Discussions about the next five-year plan and personnel decisions are announced. It takes place with a backdrop of a reported purge of senior military officials and, of course, the elevated Sino-American trade tensions. In what seems to be a move meant to appease American critics, China has replaced Li Changgang, the international trade representative who Treasury Secretary Bessent called out and said was "unhinged". Coming out of the meetings, Xi may feel especially ready to meet President Trump on the sidelines of the upcoming APEC meeting that is held October 31-November 1. The highlight of the economic news is that China reported its economy grew by 1.1% in Q3 quarter-over-quarter for 4.8% year-over-year. The details were not inspiring. Retail sales slowed sequentially on both a year-over-year and year-to-date basis. Industrial output from 6.5% year-over-year (5.2% in August). New and used home prices continued to grind lower. Property investment and residential property sales continue to contract. Fixed asset investment fell by 0.5%, the first decline since the pandemic. 

JPY: The dollar was initially sold to a nine-day low near JPY149.40 before the weekend. It recovered to post new session highs near JPY150.60, aided, arguably, by the backing up of US interest rates. The dollar may have recorded a bullish hammer Japanese candlestick, and follow-through buying lifted it to JPY151.20 today before sellers reemerged and drove the greenback slightly through JPY150.30 in the European morning. Japan's LDP formed an alliance with Japan's Innovation Party (Ishin) and that assures that Takaichi Sanae will become the first woman prime minister. Ishin sought a temporary holiday for the sales tax on food, stricter rules on political fundings, and a smaller Diet. 

GBP: Sterling posted an outside day before the weekend but the close was little changed, ostensibly neutralizing the technical tone. Still, the price action looks mildly constructive, provided the $1.3380 area remains intact. Sterling stalled at the end of last week near $1.3470. The $1.3485-90 area capped sterling on October 3, and 6-7. It also holds the (50%) retracement of the sell-off since the Fed's cut on September 17. Sterling is in a narrow range of less than half-of-a-cent above $1.3400. With a light calendar today, the Gilt-sensitive government's budget balance tomorrow poses headline risk. The September CPI is due in the middle of the week and retail sales and the flash PMI at the end of the week. As this week begins, the market is pricing in around a 12% chance of a rate cut next week and about a 40% chance of a cut by the end of the year. The current base rate target is 4%. The implied rate in the swaps market for the middle of next year is almost 3.50%, the lowest since early August. 

CAD: The US dollar recorded an outside down day against the Canadian dollar before the weekend and fell below CAD1.4020 for the first time in four sessions. It made a marginal new five-day low today, slightly above CAD1.40, where options for almost $720 mln expire today. While the price action is encouraging, it may take a break of CAD1.3960 to boost confidence that a high is in place. The Bank of Canada's Q3 business survey will be released today. The markets typically do not respond much to it. This may be especially true now, ahead of tomorrow's CPI, and in market that leans slightly toward another rate cut despite the strong jobs report at the start of the month. By playing down the significance of the underlying core inflation readings and suggesting it is really lower, the central bank has signaled the inflation report will not stand in the way of its decision.

AUD: Ahead of the weekend, the Australian dollar successfully tested last week's low (~$0.6640), which was the low since August 22. It recovered to poke above $0.6500 in the waning hours of last week's activity and saw $0.6515 earlier today. Options for about A$340 mln at $0.6500 expire today. It must overcome the $0.6535 to boost the technical tone. Despite trading below the October 10 low ($0.6475) in three sessions, it settled above it without fail last week. Australia's economic diary is practically non-existent until the preliminary PMI at the end of the week. Last week's disappointing jobs report and the heightened US-Chinese tensions the Australian dollar no favors. The futures market has a little more than 50% chance of a cut is discounted next month. It was slightly less than 33% at the end of September but reached 70% after the employment data. 

MXN: When it looked like a risk-off day before the weekend, the dollar rose to a three-day high against the Mexican peso, a little above MXN18.55. As the US equity market found firmer footing, risk appetites were rekindled, the dollar was sold to around MXN18.3650. It made a marginal new low today near XN18.3620. Last week’s low was recorded on October 16 near MXN18.3565. The US dollar's broad direction and risk-appetites may drive the peso in the first part the week. This week's data is concentrated on Wednesday (IGAE surveys) and Thursday (retail sales and first half of October CPI). 

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