United States
The US dollar has been experiencing a significant rally against major currencies for the fourth week running. The rally is underpinned by two main factors. Firstly, there has been a significant shift in the expected trajectory of the Federal Reserve’s policy, partly fueled by relatively strong economic data from both surveys and real sector reports. The derivatives market’s expectation of a 75 basis points cut by the end of the year has diminished, with uncertainty remaining over a 50 basis points cut. However, the report on job growth, influenced by recent storms and strikes, is expected to be less clean, potentially challenging this view. Secondly, the market perceives the upcoming victories of Trump/Vance as conducive to a stronger dollar, despite their preference for a weaker one, due to the interest rate channel and potential tariff increases. The economic landscape of the coming weeks is expected to be quite eventful, with the Japanese election, the UK budget, a Bank of Japan meeting, the preliminary eurozone CPI, and crucial US employment data likely pointing to a decrease in job growth. The US Treasury’s refunding announcement, set to exceed $600 billion in bills and coupons, could also mark a potential highwater point in rates, particularly if the jobs report is weak. Within the US, high-frequency data is anticipated every day in the upcoming week, with the October employment report being the most significant. US rates seemed to hit the bottom following the Fed’s initial 50 basis points rate cut, but were jolted by a stronger-than-anticipated September jobs report. The medium forecast by Bloomberg anticipates nonfarm payrolls to rise by 108k in October. The manufacturing sector shows little sign of employment revival, having decreased by 40,000 jobs this year. Preceding the jobs report, the US will release its first estimate for Q3 GDP, expected to reflect a 3.0% increase. The PCE deflator, a metric closely watched by the Fed, is also due for release, with a year-over-year rate expected to fall to 2.1%, the lowest since February 2021. Despite many media sources focusing on the core PCE deflator, it remains unclear why the headline deflator would not be the preferred target. The Dollar Index’s four-week rise mirrors its longest winning streak since February, with further gains depending on surpassing the 104.80-105.00 area.
Eurozone
The Eurozone currently exhibits limited economic momentum. The regional economy expanded by roughly 0.5% in the first half of the year, with a forecast of 0.2% growth in both Q3 and Q4. The IMF’s outlook is slightly more optimistic compared to the European Central Bank’s. The ECB’s September forecast predicted 0.8% growth for the current year, increasing to 1.3% by 2025. Meanwhile, the IMF projects the eurozone economy to grow by 0.9% this year and 1.5% the next. Despite this, Germany, the largest economy in the region, hasn’t seen consecutive quarterly expansions since late 2021. Historically, the inhibition against robust growth in the eurozone has been attributed to a lack of integration or exit, with the current environment suggesting a default to paralysis. The eurozone’s preliminary CPI for October, due on October 31st, might reflect a tick upward in inflation due to base effect comparisons from the previous year. Speculation regarding a December 50 basis points cut by the ECB is perceived as somewhat exaggerated. The euro has struggled to maintain its value, with its descent correlated to the widening US two-year premium over Germany. Continued narrowing of this premium is crucial for the euro to find its footing.
United Kingdom
In the UK, the focus is on upcoming mortgage and consumer credit reports, though they are not expected to significantly impact the market. The spotlight is on the Autumn budget slated for October 30th. The narrative depicting a gloomy financial state left by the previous government could potentially backfire for the Labour Party, which may face criticism for tax hikes planned to address a purported GBP22 billion fiscal gap. The new government, led by Prime Minister Starmer, is seen as failing to rekindle optimism, with market confidence shifting towards a Bank of England rate cut announcement expected on November 7th. Sterling has seen its longest decline this year, and any failure to maintain its level could lead to further depreciation.
China
China is set to release its October PMI on October 31st and Caixin manufacturing PMI on November 1st. The measures recently taken to support the property and stock markets and mitigate local government financial risks may not yet reflect in these indicators. The recent strengthening of the yuan seems likely to reverse alongside a broader dollar descent against G7 currencies.
Japan
Japan will hold its lower chamber Diet elections on October 27th, with speculation about the possibility of the LDP losing its outright majority. Nevertheless, the ruling coalition is expected to retain governance with Komeito. Consequently, anticipated forthcoming policy changes include support measures targeting surging prices. The Bank of Japan will conclude its meeting on October 31st, with limited near-term policy changes anticipated. The yen has been losing value against the dollar as US 10-year yields rise, with any move above critical levels likely to trigger further gains amidst probing for Japanese officials’ pain threshold.
Canada
Canada’s aggressive rate cut trajectory has set a distinct pace in monetary policy, with a total of 125 basis points cut since June. Despite the market’s anticipation of further cuts, underlying core inflation remains above target levels. Political risk looms on the horizon with the minority Liberal government facing potential support withdrawal. The Canadian dollar’s recent weakness aligns with a strong US dollar environment, with little standing in the way of testing historical highs set earlier this year.
Australia
The Reserve Bank of Australia, set to meet on November 5th, will likely remain unmoved by the quarterly CPI report released on October 30th. A lower inflation print could potentially prompt the market to bring forward a cut, albeit such a motion is not anticipated until April. The Australian dollar has been on a declining trajectory, with demand possibly tapering off amidst modest retail sales. The currency’s immediate future hinges on stabilizing against recent low points.
Mexico
In Mexico, several upcoming data releases will provide insights into the nation’s economic performance. However, market focus is on the implications of potential outcomes of the US election, particularly a Trump victory, due to associated economic risks. Banxico’s market outlook remains cautious with upcoming discussions regarding potential rate cuts. The Mexican peso, although exhibiting some weakness, has relatively held its value on a month-to-month basis compared to emerging market peers.
