Flat September CPI Boosts Speculation of a BOE Rate Cut While Weighing on Sterling

[Redator]

Overview: The US dollar is mostly narrowly mixed among the G10 currencies. Sterling is the exception, and it is off about 0.35% after the softer than expected CPI spurred speculation of a rate cut. The 10-year Gilt yield is off seven basis points while most European bond yields are narrowly mixed, less than one basis point changed. Most emerging market currencies are also softer. The Dollar Index is rising for the fourth consecutive session. The volatility seen in gold and rare earth equities is also continuing today. Gold, which set a record high a little above $4381 on Monday, approached $4000 today to fray the 20-day moving average (~$4019) for the first time in two months. It has recovered and is trading near $4070 in the European morning, having settled near $4125 yesterday. 

Equities are mostly lower, though the Asia Pacific bourses were mixed. Japanese indices themselves were mixed, while China, Hong Kong, and Taiwan markets fell. South Korea and India were higher, while profit-taking in Australis pushed the ASX 200 off its record high. Europe's Stoxx 600 is off for the first time this week and is giving back yesterday's 0.20% gain. US index futures are narrowly mixed. The US 10-year Treasury has slipped below 3.96%. Last Friday's low was near 3.93%. December WTI bottomed on Monday, a little below $56 and is now trading at a four-day high slightly above $58. 

USD: The Dollar Index is rising for the fourth consecutive session today. It has met the (61.8%) retracement of the decline from the month's high recorded on October 9. The next nearby target is seen around 99.20. The odds-on favorite in the event markets is that the US shutdown surpasses the record of 35 days set during President Trumps' first term. Today, the current one becomes the second longest. An off-ramp is still not in sight, though reports (see Politico) claim Republican leaders are quietly increasing talk with their senior ranks and with White House officials over how to structure a potential extension of critical Affordable Care insurance subsidies before year-end.

EURO: The euro exceeded the (61.8%) retracement of this month's gains with yesterday's loss of the $1.1615 area. It slipped slightly below $1.1600. Losses have been extended to $1.1590 today. A break of $1.1585 now leaves little on the charts ahead of this month's low near $1.1540. Although the euro made a marginal new multi-year high near $1.1920 when the Fed cut rates last month, with the brief exception in late July/early August, it has been in a mostly $1.15-$1.18 range since late June. It is as if it is consolidating the nearly 16.5% rally in H1 25. With the US two-year yield near its lowest level in three years, the US premium over Germany hovering slightly above the year's low (~150 bp), and daily momentum indicators turning up from oversold conditions, losses are likely to be limited.

CNY: The dollar eased to a marginal new low for the month yesterday near CNH7.1160 but recovered amid the broadly stronger greenback and settled back above CNH7.1250. The greenback remains in the range set last Friday: ~CNH7.1170-CNH7.1325. Contrary to conventional wisdom that warned China would weaponize the exchange rate, the PBOC has continued to guide the yuan higher and dollar lower. The dollar's fix, this year, peaked in mid-April near CNY7.2131. It was set today CNY 7.0954, after the low fix for the year was set yesterday at CNY7.0930. Meanwhile, with little fanfare, the US 10-year premium over China has narrowed dramatically. It was around 315 bp at its widest in mid-January and is less than 215 bp now. It is the least since last October.

JPY: The dollar fell 12% against the yen in the first four months of the year and through October 9-10, had rebounded by around 9.5%. The (61.8%) retracement of the slide in the first part of the year is found near JPY151.60. Last Friday, the dollar was sold to about JPY149.40 before rebounding. The bullish candlestick saw the greenback rise slightly above JPY152.15 yesterday. The dollar is consolidating in about a half of a yen range below JPY152.00. Prime Minister Takaichi wasted no time. Within hours of her election, she instructed the cabinet to put together a new economic package. The yen seemed to pare its earlier losses on the news. Japan reported that September's trade deficit was in line with August's shortfall (JPY235 bln vs. JPY242.8 bln). Japan has reported a trade deficit of about JPY2.84 trillion in the first nine months of the year compared with a JPY3.6 trillion deficit in the same period last year. On a year-over-year basis, exports turned up for the first time since April (4.2%). Imports have fallen year-over-year for most of the year but may be stabilizing. Lastly, despite a couple of hawks at the BOJ trying to make a case for a rate hike next week, the market remains skeptical. The swaps markets have nearly ruled it out. At the end of September, the market was discounted almost a 70% chance of a hike.

GBP: Sterling fell to nearly $1.3360 yesterday where it met the (50%) retracement of last week's bounce. The next retracement (61.8%) is around $1.3335 has been surpassed today with sterling's retreat to slightly through $1.3315. Nearby support may be around $1.3290 and then last week's low (~$1.3250). The UK's CPI was flat in September for a cumulative increase of 0.4% in Q3. Recall that a rise in utilities in Q2 lifted the cumulative increase to 1.9% after a 0.6% gain in Q1. The year-over-year rate was unchanged at 3.8%. Members of the Monetary Policy Committee, which meets next week, will find some comfort in the slippage core price pressures (3.5% vs. 3.6%), though service prices were unchanged (at 4.7% year-over-year. The UK has the dubious honor of having the highest CPI among the high-income countries. Still, the swaps market boosted the odds of a rate cut next week to about 37% from around 13% yesterday. We suspect this is somewhat exaggerated. 

CAD:  The Canadian dollar recorded the session low yesterday near CAD1.4000 after the stronger than expected Canadian CPI. Its September CPI unexpectedly rose by 0.1%. The median forecast in Bloomberg's survey looked for a 0.1% decline, the same as in August. In September 2024, the monthly CPI fell by 0.4%. Thus, the base effect drove the headline rate to 2.4% from 1.9%. This is the highest since February. The underlying core rates, which Bank of Canada Governor Macklem has played down, also remained firm, and both are now above 3%. Nevertheless, the swaps market was not impressed. The perceived probability of a cut next week eased to around 70% from near 77%. After the stronger than expected jobs data on October 10, the market had a 40% chance of a hike priced. The US dollar rallied almost 2.6% from the low on the last Fed Day (Sept 17) to last week's high. It has been consolidating in choppy price action between roughly CAD1.40 and CAD1.4065 but frayed the lower end today having slipped to about CAD1.3995. Canada reports August retail sales tomorrow. They are expected to have fully recovered July's 0.8% decline.

AUD: The Australian stock market pulled back from the record highs set yesterday, encouraged by the deal struck with the US on rare earths, but the Australian dollar struggles. After reaching a six-day high yesterday (~$0.6525), it was sold through Monday's low (~$0.6475). It is trading quietly today (~$0.6485-$0.6510). Last week's lows were in the $0.6440-5 area. Early Monday, New Zealand reported a firm Q3 CPI (1.0% quarter-over-quarter after rising 0.5% in Q2). The year-over-year rate edged up to 3.0% from 2.7%, which is the highest since Q2 24. It is the fourth consecutive quarterly increase after falling from the end of H1 22 (7.3%) through Q3 24 (2.2%). Nevertheless, the market is convinced this will not deter the Reserve Bank of New Zealand from cutting rates at next month's meeting. The New Zealand dollar was sold to a six-month low on October 14, a few days before the CPI. It reached $0.5760 today, its best level since October 9. This overshot the (61.8%) retracement of this year's rally found near $0.5730. 

MXN: The dollar's broad gains saw it approach MXN18.49 yesterday. Last week's high nearly MXN18.63, and the month's high, recorded on October 10, was about MXN18.6370. The dollar's gains were pared, and it settled below MXN18.44. The greenback has only settled above MXN18.50 once since September 10. It is trading with a heavier bias today, but in a narrow range (~MXN18.3980-MXN18.4540). Mexico's IGAE economic activity measure, to be reported today, is expected to have edged up in August after falling by nearly 0.90% in July. It has averaged a 0.28% decline in the three months through July, which is the worst three-month period this year. Tomorrow, Mexico reports retail sales (expected to rise by 0.2% after a 0.1% gain in July) and CPI for the first half of October. The headline and core year-over-year rates are expected to slip slightly, according to the median forecast in Bloomberg's survey. Meanwhile, tensions between the US and Colombia weighed on the peso on Monday. The Colombian peso fell by about 1.4%, which gave back a little more than half the gain of the previous three sessions. The dollar gapped higher on Monday and held the top of the gap yesterday (Monday's low was ~COP3847) and reached a four-day high a little above COP3907. The US dollar also rose to new highs against the Argentine peso. It was the sixth consecutive advance. The greenback settled last week slightly above ARS1329 and reached nearly ARS1490.50 yesterday. 

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