Marc to Market

Week Ahead: Fed's Focus on the "Accumulation of Information" Takes Thunder from CPI

noreply@blogger.com (Marc Chandler) — Sat, 7 Nov 2026 06:48:53 -0500

(Business travel will disrupt the commentary for the next ten days. It will resume November 18. Good luck, and thank you for your patience.)

The dollar rose against all the G10 currencies last week except for the Swiss franc. The gains were concentrated against the dollar-bloc currencies and the Scandis. Neither sterling nor the Australian dollar drew comfort from their central bank rate hikes. Nor for that matter was the Mexican peso pushed, except for the initial reaction, to the unexpected rate cut.

The US midterm election results boosted two narratives. The first was on limits to data centers. The second was a more optimistic of ending the war with Iran. The Philadelphia Stock Exchange Index fell by almost 12.5% last week. Even if one wants to link part of that to the election, note that it was the fifth consecutive weekly decline. The second narrative helps explain the nearly 13.5% drop in the December WTI contract, and it snapped a five-week rally. The 10-year US Treasury yield fell for the fifth consecutive week. It may be difficult to extend decline much further, with strong jobs report in hand, only a new shock can deter the Fed from hiking in December.

Drivers: The Dollar Index has become more correlated (30 days) with changes in the US 10-year yield than changes in the two-year yield (~0.47 vs. 0.33). DXY's 30-day correlation with changes in the Philadelphia' Stock Exchange's Semiconductor Index has been inverted this year, except for around three weeks in late January through early February, and again briefly in late July. It has been positively correlated again over the last couple of weeks and is approaching the year's high (~0.20). The stronger than expected October jobs report offset the decline in stocks and cracks in the AI meme and reinforced expectations of a December hike.

Data: Of course, the CPI and PPI are the week's highlights, but are they very meaningful? The Fed's use of the phrase "the accumulation of more information" appears partly aimed at directing the public and businesses away from putting too much emphasis on any single data point. Second, after the October jobs report, the market has little reason to second guess itself over the likelihood of a hike at the next FOMC meeting in December. Because of the government shutdown last October, the BLS will not report a year-over-year CPI this week. Headline US CPI has risen at a 4.4% annualized pace over the past three months. The core rate has risen at a 3.2% annualized clip in July-Sept period, which is a little faster than in the previous three-month period. The median forecast in Bloomberg's survey is for a 0.3% rise in the October headline rate, which would still see the 3-month annualized pace accelerate. The median forecast for the core rate is 0.2%, which if accurate would keep the three-month annual pace steady. Producer prices are rising faster. Even with food and energy excluded PPI rose 5% year-over-year in September. The headline rate was 6.3% and new cyclical high. It was rising at a 3.1% year-over-year pace in the three months before the Middle East war disruption.

Prices: The Dollar Index was bid before the US jobs report and extended its gains after it. DXY has risen above the down trendline connecting mid- and late October highs, found near 102.20 before the weekend. A move above 102.50 signals a test on the year's high (~103.00). Given the positioning of the momentum indicators, there may be scope toward 104.00-104.50 in the coming weeks.

EMU

Drivers: Over the past 30 sessions, changes in the euro have been less inversely correlated to changes in the US 10-year yield (~-0.33) as it is to French premium over Germany's 10-year rates, which is around 0.48. The correlation between changes in the exchange rate and the US-German two-year rate differential is around -0.42. While changes in the euro are positive correlated with changes in Germany's two-year yield (~0.22), it remains inversely correlated, albeit slightly, with changes in Germany's 10-year yield (~-0.14).

Data: With the update of Q3 GDP more details will be provided. Without fresh impetus, year-over-year growth looks stuck around 1.0%-1.5%. Uninspiring. The September trade figures may be more interesting on November 13. With little fanfare, the eurozone reported a blowout deficit in August of $16.1 bln euros. It was the largest in a few years. And notably it swung the trade balance into deficit for the first eight months of the year (~5.4 bln euros) compared with a surplus of ~90.8 bln euros in the Jan-Aug period of 2025 and 104 bln euro surplus in the same 2024 period.

Prices: The euro reached nearly $1.1275 in the knee-jerk reaction to the US midterm elections. We were skeptical and anticipated it would set back ahead of the US jobs data. The jury was still out until the stronger than expected US employment data saw the euro fall to almost $1.1130 before the weekend. Recall that the euro reached almost $1.1100 in late October, which more or less coincides with the (50%) retracement of the rally from the Feb 2025 low (~$1.0140). The euro does not appear to have bottomed. A break of $1.11 could target the $1.10 area but the next retracement target is around $1.0880.

PRC

Drivers: By increasing the reserve requirements for foreign currencies, the PBOC signaled an end to the one-way appreciation of the yuan. The yuan strengthened without interruption in the last dozen sessions in October. The 2% increase the reserve requirement is substantive in the sense that it will lock an estimated $20-$25 bln of liquidity at the banks, but it is also sending a clear signal. The dollar rose against the yuan for the first week in six weeks. If the PBOC has put a cap on the yuan, then the given rates, it could be an attractive funding currency.

Data: It is an important week for Chinese data. Although many participants may be skeptical of the accuracy of the economic data, they do seem to take the CPI and trade figures at face value. Both will be reported in the coming days. The general narrative, or the judgement made by what the Federal Reserve might call the "accumulation of information," will not change. China's consumer inflation is lower. The consensus conclusion is that this reflects weak demand. Yet, on per capita basis, consumption is rising, and investment has risen faster. Moreover, everyone might call their index the same thing (CPI), it is measured differently. For example, in China's CPI, food has weight about 25% less in than in the US measure, and weight China gives to shelter is less than half of what the does. The trade story cannot change much. Yes, China has a large trade and still growing trade surplus. However, its trade figures belie arguments about de-globalization--in September Chinese exports were up by 36.3% year-over-year, and imports were up 31.%.

Prices: It is difficult to know the intent of Beijing, but we suspect the market will be content to job the dollar between CNH6.65 and CNH6.70. We will continue to pay close attention to the PBOC's daily fix. It rose last week, albeit slightly, for the first time in nearly three months.

Japan

Drivers: The dollar-yen exchange rate has become more sensitive to changes in US interest rates. The correlation between changes in dollar-yen and the US 10-year yield is a little below 0.60. It reached the high for the year slightly higher in mid-June (~0.65). Recall that in early August, it was briefly inversely correlated. The correlation between the changes in the exchange rate and the US two-year yield recorded the high for the year, near 0.70 in late October. It is slightly now about 0.65. In early August, it was at a six-month low below 0.20. The dollar-yen exchange rate is inversely correlated, as one might intuit, with changes in Japan's two-year yield, but we would note that it is modest around -0.20 and it spent most Q2 with a positive correlation. The two-year yield is a proxy for the medium-term policy outlook. Over the past week, the swaps market downgraded the chances of a BOJ hike next month to about 52% from a little more than 80% a week ago.

Data: Japan reports September trade and current account figures on November 10. Before 2015, there was a seasonal pattern of improvement in the September. It has broken down and over the past several years, it has been nearly 50/50. However, this year's trend has been higher. In the first eight months of the year, Japan recorded an average monthly current account surplus of JPY2.37 trillion (~$15 bln), a little more than 20% higher than the average in the January-August 2025 period. Yet, Japan continues to report a trade deficit, and this is despite an exchange rate that is historically cheap on numerous metrics. Through August, Japan recorded a nearly JPY410 bln trade deficit. That said, the deficit is gradually being reduced and will likely swing back into surplus next year. The deficit in the first 8 months of 2025 was about JPY1.54 trillion and JPY2.68 trillion in the same period in 2024. On November 10, Japan also reports September household spending. Despite real wage growth this year, household consumption has not risen on a year-over-year basis since last November. The 3.1% contraction in August (year-over-year) was the smallest in three months. The correlation between the year-over-year change in retail sales and household consumption is not particularly robust (less than 0.2 over the past 36 months), but we know that retail sales slowed to 2.3% year-over-year in September from 2.9% in August. Japan reports October PPI on November 12. It fell by 0.3% in both August and September. Producer prices likely rose in October but given the base effect (0.5% in October 2025), the year-over-year pace may have moderated for the third consecutive month. It peaked in July at 7.7% year-over-year and was at 6.8% in September, a four-month low.

Prices: The dollar made a marginal new low for the week against the Japanese yen near JPY157.25 before the US jobs report. Afterwards, the greenback was bid slightly above Thursday's high (~JPY158.50) before it consolidated and settled strongly. The dollar is butting up against the upper end of a trading range that has persisted for more than six weeks. That area also corresponds with the halfway mark of the range from the four decades high in July (~JPY164) to the September low (~JPY152.90). A break higher spur a move toward JPY160, ahead of which Japanese officials may verbally intervene.

Drivers: With a couple of exceptions, since early April the rolling 30-day correlation between changes in sterling and the two- and 10-year UK yields have been inverse. The inverse correlations are now about -0.15 and -0.40, respectively. Sterling is a little inversely correlated with changes in the US two- and 10-year rates (-0.15 and -0.28). The EU and UK summit is on November 20, and regardless of the eventual destination, the path of travel is clear, relations with Europe will deepen and broaden again. While the UK will continue to insist on maintaining sterling, the correlation between the euro and sterling high--since late January, the 30-day correlation has not been below 0.75. It is now a little above 0.90. The 100-day correlation is slightly below 0.85. It has not been below 0.80 since the end of Q1 26.

Data: The UK reports Q3 GDP on November 12. The British economy is seen to be gradually slowing. It grew 0.6% in Q1 and 0.5% in Q2. It is expected to have grown by 0.4% in Q3 and projected to slow to 0.2% in Q4 (median forecasts in Bloomberg's survey). The monthly GDP reports do not add up to the quarterly figure. In Q2, the cumulative monthly growth was 0.3% and in Q1 it was 1.0%. Still, for more context, the UK economy grew 0.4% in July and 0.1% in August. September details will also be provided. After last week's hike, the market has about a 55% chance of a follow-up hike at the next meeting on December 17, which seems somewhat high. Subjectively, we suspect it may be closer to a 1-in-3 proposition.

Prices: Sterling briefly traded above $1.35 last week for the first time since mid-September. Perhaps sterling fell victim to buy the rumor of a rate hike and sell the fact when it was delivered. Sterling settled lower on Thursday, when the BOE hiked, and took a bigger leg down ahead of weekend, slightly below $1.3345. Sterling settled below the trendline connecting the mid- and late-October lows, found ~$1.3380 on Monday. Nearby support may be around $1.3320, the (50%) retracement of sterling's bounce from the mid-October low, near $1.3135. However, more telling will be whether $1.3275 area, the low from late October holds.

Canada

Drivers: The typical driver of the exchange rate has slackened. The rolling 30-day correlation of the changes in the Dollar Index and the greenback against the Canadian dollar has eased from 0.80 in the second half September, the high for the year, to around 0.70 now. In terms of US interest rates, the exchange rate is more correlated over the past 30 sessions with the US 10-year yield and two-year yield have converged near 0.40. The correlation between the exchange rate and the two-year differential is also around 0.40. The 30-day correlation of the exchange rate and changes in the US 10-year premium over Canada has eased form over 0.60 in mid-September to a little below 0.45 now. The swaps market was already downgrading the chances of a December rate hike before the disappointing jobs data ahead of the weekend. The odds fell to about 37% from a little more than 50% a week ago, which still strikes us a bit elevated.

Data: Canada's economic reports feature September building permits, manufacturing sales, and wholesale sales, which are not typically market movers.

Prices: On the last trading day in October, the US dollar fell to about CAD1.3940, which met the (61.8%) retracement target of its rally from late August (~CAD1.3730) to the mid-October high (e~CAD1.4300). It made a marginal new low in the immediate post-US mid-term election sell-off but recovered smartly and reached almost CAD1.4140 ahead of the weekend after the diverging employment reports. The next target is in the CAD1.4160 area, but we suspect there may be potential to retest the October high, given the positioning of the momentum indicators and a greater sense the widest policy rate gap in 30 years may persist longer than anticipated.

Australia

Drivers: Over the past 30 sessions, the inverse correlation between changes in the Australian dollar and the Dollar Index has moderated around -0.25, the least since November 2025. It bottomed near -085 in May. The 30-day correlation between the exchange rate and the US two-year yield has turned positive (~0.25) for the first time since late March. It bottomed in June around -0.82. Meanwhile, the Aussie's correlation with changes Australia's two-year yield has risen to nearly 0.40, the most this year, while the correlation with changes in Australia's 10-year yield has jumped to almost 0.33 from a small inversion around the middle of October. It peaked this year in August near 0.45. The Aussie's 30-day correlation with changes in gold peaked a little below 0.90 in June and has trended lower and is now near zero. It was last inverted in July 2025, albeit briefly.

Data: After last week's rate hike, Australia's economic calendar turns light. A couple of bank confidence surveys and some data on home loan and investor loan values. Melbourne Institute Inflation Expectations (trimmed mean) will be reported on November 12. It was at 4.7% in July, the lowest since January, and rose to 4.9% in August and September, before it rose to 5.3% in October. The futures market sees about a 2/3 chance that last week's hike ends the tightening cycle.

Prices: The Australian dollar was tagged for about 2.2% last week, its worst week since Liberation Day week in April 2025. It would appear that the macro developments were supportive; the central bank hiked for the fifth time this year, the final composite PMI was revised up (though still below the 50 boom/bust level), household spending was more resilient than expected, and the September trade surplus was nearly three times larger than expected. The Aussie was sold to $0.6855 ahead of the weekend, its lowest since the end of Q1 26. The low set in March was closer to $0.6835, but the downside risk may extend toward $0.6760. The technical caveat is that the Aussie settled well below the lower Bollinger band (~$0.6900).

Mexico

Drivers: The Mexican peso has become somewhat unmoored to its usual drivers. Even the usually robust correlation with the JP Morgan Emerging Market Currency Index has slackened. It was the weakest since January (slightly below 0.60). The correlation of the dollar's changes against the peso and changes in the Dollar Index is near 0.20, which is also the weakest since January. The exchange rate's correlation with changes in the US two-year yield is slightly inverses for the first time since March. It peaked in June above 0.80. The correlation of the changes in the exchange rate and Mexico's two-year yield is near zero. It peaked in April, near 0.70. The exchange rate's inverse correlation with changes in the S&P 500 has also moderated. It is now near -0.25, around the least in nine months. It was around -0.85 in April.

Data: Mexico's central bank surprised most market participants, including ourselves, by delivering a quarter-point rate cut last week. It did sound dovish at its previous meeting, but many seemed to play it down by putting in the context the central bank trying to secure some degrees of freedom from the Federal Reserve. The 3-2 vote seemed to be spun as a one-off adjustment. Its forward guidance was for an extended pause. That means that this week's October CPI is unlikely to have much impact on the central bank's reaction function. Still, the risk is that the October CPI accelerates a little from September 3.45% and 3.75% readings for the headline and core, respectively. Prices did rise faster in the first half of October. The economy is not growing to potential and the 0.9% quarter-over-quarter expansion after 1.4% in Q2 represents a near-term peak. The median forecast in Bloomberg's survey sees growth slowing to 0.2% this quarter before recovering to 0.5% in Q1 27. September industrial production will be reported on November 11. Through August, it rose by an average of 0.25 compared with an average of a 0.03% contraction in the first eight months of 2025 and -0.10 average in the first eight months of 2024. Yet, this may overstate the demand in the domestic economy. Mexico's exports have risen by about 36% year-over-year in the first nine months of the year. Yet, Mexico's auto exports have actually declined slightly this year. Through September vehicle exports have slowed to 2.53 mln from 2.57 mln. Mexico's vehicle production has also slowed. Through September, Mexico produced 2.95 mln vehicles (exports the vast majority) compared with 3.03 mln in the Jan-Sept 2025 period. A few countries' ratio of vehicle export to production rival Mexico's (Canada, Spain, and Slovakia). China's sheer size is source of its disruption. It exports a more modest 20% (compared with ~80%-90%) of its vehicle production or around 6 mln vehicles (and rising).

Prices: The dollar traded between a little below MXN18.53 and MXN18.87 last week, moving in broad intraday ranges. It has been in this range for about two-and-a-half weeks. The technical question is whether this is a topping pattern or a nesting before another leg up. We had previously thought there was potential into the MXN19.00-19.0750 area. A convincing break of the MXN18.50 area, which would likely coincide with the five-day moving average fall below the 20-day moving average for the first time since mid-September, would suggest a dollar high is in place. The median forecast in Bloomberg's latest survey is for the dollar to end the year at MXN18.3450 (the indicative forward is around MXN18.7050). We suspect the dollar can be even lower (~MXN18.00-MXN18.20).

Disclaimer

US Jobs Report Competes with the Unsettled Equity Market to Drive the Greenback

noreply@blogger.com (Marc Chandler) — Fri, 6 Nov 2026 06:47:41 -0500

The US dollar is broadly stronger. Against many G10 pairs, it is at its best level since Tuesday’s midterm elections. Ahead of the US jobs report, the euro and sterling are holding on to small gains for the week. The Antipodean currencies and the Norwegian krona are off 1.5%-2.25% this week.

The sharp equity losses in recent days, reflecting, in part, questions over the AI meme, and the sharp drop in oil prices this week (December WTI is off 12.6%, even after yesterday’s 2.7% recovery and firmer prices today) are important drivers this week. Ten-year yields in the G10 are off 2-14 bp this week, with nearly 14 bp decline in JGBs coming today. The 10-year Gilt yield eased the least—a little more than two basis points. A poor US jobs report can still roil the markets. Ahead of the report, the Fed funds futures are discounting a little less than a 70% chance of a December Fed hike, which is the lower end of where it has been since early September.

Prices

G10

• The euro traded within Wednesday’s range yesterday. It set the session low slightly ahead of $1.1200 before the 3.1 bln euro options expired. As falling US equities dragged down US rates the euro recovered to almost $1.1240. It has been sold to a four-day low in Europe today below $1.1170. Nearby support is seen in the $1.1150-55 area. Options for 960 mln euros at $1.1150 expire today. It has not been much above $1.1190 in Europe.

• The dollar recorded the session high against the yen yesterday in North America, near JPY158.50 before equity market opened. It took a little more than an hour, but the greenback was driven to new session lows (~JPY157.65) as the sharp drop in equities pressured US rates lower. It was sold to almost JPY157.25 before it rebounded to JPY158.40 in Europe. Some buying may be related to today’s expiry of $3.6 bln of options struck at JPY158.

• Sterling’s session high yesterday was recorded in Asia Pacific turnover near $1.3500, a few hundredths of a cent below Wednesday’s high. Even after the BOE delivered the expected quarter-point hike, sterling was unable to rise above about $1.3485. At the end of H1 27, the swaps market sees the base rate at 4.57% (currently 4.0%, up from about 4.52% at Wednesday’s close and 4.50% at the end of last week). It returned toward the week’s low near $1.3380 today. Nearby support is seen in the $1.3350-65 area.

• The Canadian dollar traded quietly yesterday. The greenback was confined to Wednesday’s range and traversed between around CAD1.3945 and almost CAD1.4025. The recent consolidation is a base. and the US dollar reached a little above CAD1.4080 today its best level in two-and-a-half weeks. Options for around $625 mln at CAD1.4050 expire today. The next technical target may be around CAD1.4160.

• The Australian dollar was the weakest G10 currency yesterday. It lost about 0.75% and posted an outside down day by trading on both sides of Wednesday’s range and settling below its low. It has continued to fall today. It has approached $0.6860, its lowest level since early April. Some selling may be linked to the expiry of options for almost A$800 mln at $0.6900 today. The Bollinger Band is set at two standard deviations below the 20-day moving average. With today’s sharp losses, the Aussie has approached three standard deviations (~$0.6855).

• Catching most off-guard, Mexico’s central bank cuts its overnight target rate by 25 bp to 6.25% and indicated it would remain there for an extended period of time. It was a 3-2 vote and characterized as a “one-off”. The Mexican peso extended the session’s losses. The dollar spoked to the session high, slightly above MXN18.8450. That the greenback did not take out Wednesday’s high (~MXN18.87) may have little technical significance. Still, it is consolidating with a softer bias today. It is in range through the European morning between about MXN18.6765 and MXN18.8145. Yesterday’s price action reinforced dollar support near MXN18.50 that has been forged over the past two weeks.

• The dollar was sold to a marginal new low for the day against the offshore Chinese yuan in the North American morning, near CNH6.6635, slightly below Wednesday’s low. Our working hypothesis is that, following the PBOC signals, a consolidative phase has begun, which may keep the dollar between CNH6.65 and CNH6.70. It is trading between CNH6.6615 and CNH6.6690 today. The PBOC set the dollar’s reference rate higher for the fourth time this week (CNH6.7168 vs. CNH6.7156. On weekly basis, it was the first time the dollar’s reference rate rose since early August. The fix was at CNH6.7138 a week ago.

• The drop in oil prices coupled with foreign demand for Indian stocks and has helped lift Indian rupee. It rose for the sixth consecutive session today. It rose by 1.1% this week, and it is the third weekly gain in the past four weeks. The greenback fell below INR94.00 for the first time since April. It settled below the 200-day moving average (~INR94.24) for the first time since July 2025.

Other Markets

• The sharp drop in US equities yesterday cast a pall over today’s activity. The Nasdaq Composite was driven below its 200-day moving average for the first time since April. The S&P 500 fell below 7500 for the first time since the end of July. It 200-day moving average is near 7325. Of the large bourses in the Asia Pacific region, only India escaped the carnage. Its major indices rose by 2%. However, Japan, Taiwan, and South Korean markets were tagged with 4.5%-6.0% losses. China’s CSI 300 was off almost 1.5%. Europe’s Stoxx 600 is off around 1.75%, which leaves it down by about 0.5% this week. Nasdaq 100 futures are 1.1% better and the S&P futures are around0.2% higher.

• The sharp equity losses offset the jump in oil prices to send US yields lower. The 10-year US Treasury yield, which saw 5.36% a month ago, approached 4.81% yesterday. The 55 bp pullback compares with about a 37 bp decline in the anticipated Fed funds effective rate at the end of next year. While the German 10-year bund yield declined three basis points yesterday, peripheral yields edged higher. Today, benchmark 10-year yields are lower across the board. The 10-year yield tumbled nearly 14 bp today (to 2.62%). European rates are mostly firmer, with UK Gilts and French Oats leading with 2.5-3.5 bp increases. The 10-year US Treasury yield is near 4.85%.

• Gold’s surge extended to almost $4147 yesterday, its best level since October 20, and the first close above the 20-day moving average (~$4066 today) since September 3. It is consolidating today with a heavier bias. It found support near $4036 today and is back near the 20-day moving average. Silver rose to almost $53.50 yesterday, a new five-day high. Resistance is seen around $55. It is trading between about $51.20 and $52.20 today.

• December WTI made a marginal new low near $86.65 yesterday before it rebounded above $90 amid reports that a couple of ships that hit mines were on fire in the Strait of Hormuz. The outcome of the US midterm election may have spurred exaggerated hopes of a near-term end to the war. The contract rose to almost $92.55 today before falling in the European morning to nearly $89. It is now near $90.75, which puts it down about 12.8% this week, snapping a five-week surge.

Data

• The focus is squarely on the US employment report. The median forecast in Bloomberg’s survey is for a 65k increase after 29k in September. The three-month moving average is 51k. The year-over-year pace of hourly earnings may dip below 3% for the first time since May 2021. The unemployment rate is expected to remain steady at 4.2%. The University of Michigan’s preliminary November reading may have little impact if inflation expectations hold steady (4.7% for the one-year and 3.5% for 5–10-year outlook). Depressed consumer confidence has not curtailed consumption. Part of the reason is increased household borrowing and the drawdown in savings. September consumer credit will be reported late in the session. It has risen by an average of $12.25 bln a month this year through August. It rose by an average of a little less than $8.4 bln in the first eight months of 2025.

• Canada reports its October employment report, too. The median forecast in Bloomberg’s survey is for a 15k increase after a 68.3k decline in September, which was roughly evenly divided between full- and part-time positions. The unemployment rate is expected to hold steady at 6.5%, though economists are projecting a small increase in the participation rate. The swaps market sees the outlook for next month’s Bank of Canada meeting is nearly a 50/50 proposition.

• The eurozone reported a larger than expected 0.7% decline in September retail sales. They rose by a revised 0.4% in August (initially 0.1%). The year-over-year pace slowed to 0.4% from a revised 1.3% in August (initially 0.8%). Last September, the year-over-year increase was 1.3%.

• German industrial output rose by 0.7% in September. The median forecast in Bloomberg’s survey was for a 0.1% decline. The good news was dulled by the revision in the August series to 1.0% from 2.0%.

• Japan reported September labor earnings today. Cash earnings rose 4.6% year-over-year (3.9% in August). When adjusted for inflation, real cash earnings accelerated to 2.2% from 1.6%. Using the same base for scheduled full-time pay saw a 3.1% rise (2.9% in August). Cash earnings with the same sample base rose 4.4% after a 2.8% gain in August. However, more important for economic rigor is if the wage increases lead to higher consumption and so far, that does not look to be the case. Next week, Japan will report September household spending. It contracted by 3.1% year-over-year in August. It has not been positive this year.

Disclaimer

BOE Initiates Tightening Cycle with Quarter-Point Hike

noreply@blogger.com (Marc Chandler) — Thu, 5 Nov 2026 07:02:49 -0500

In the initial reaction to the US election results, the dollar and US equities were sold. The market talk was about the implications for the AI build-out. The AI meme questioned and the Philadelphia Stock Exchange’s Semiconductor Index (SOX) fell by 3.1%, though the Nasdaq Composite rallied 1.4%. However, in North America yesterday, the focus shifted a bit. Another implication of the shifting US political landscape was the war in Iran. December WTI dropped by 8.3% yesterday, the largest single day decline since the war began. This helped drive rates lower.

The dollar fell again in Asia Pacific trading today but is mixed now. As the North American session gets underway, the dollar is a little firmer against most European currencies, except the Norwegian krone and is slightly softer against the dollar-bloc currencies and Japanese yen. As widely expected, the Bank of England began its tightening cycle with a quarter-point hike (to 4%), while Norway’s Norges Bank stood pat. Its deposit rate is 4.5%.

Prices

G10

• The euro peaked yesterday in early North American turnover slightly shy of $1.1275. However, it trended lower for most of the session and recorded a low around $1.1215. The settlement was not particularly impressive relative to the day’s range, but it was still the highest close in two weeks. The euro was bid back to almost $1.1270 in Asia Pacific turnover but has been sold to session lows in the European morning, slightly toward yesterday's low. Options for a little more than 3 bln euros at $1.12 expire today.

• The dollar closed in the upper end of yesterday’s range against the yen, a little below JPY158.50. In the past two sessions, the upside has been blocked around JPY158.75. Last month’s high was near JPY159. Today, the dollar recovered from JPY157.80 to prove the JPY158.45 area in Europe. Options for $3.3 bln at JPY158 expire tomorrow.

• Sterling, which last week looked poor when it traded below $1.3280, rose slightly through $1.35 yesterday. It settled near $1.3475, which was still its highest close since mid-September. It met seller late in the Asia Pacific session as it poked above $1.35 again but was sold in Europe, ahead of the BOE’s decision. Support near $1.3450-60 was frayed. The next area of support is in the $1.3430-40 area. Sterling initially ticked on the rate hike (8-1 decision).

• The US dollar traded on both sides of Tuesday’s range against the Canadian dollar yesterday and the close was neutral. The greenback was sold to CAD1.3930, its lowest level since September 16, early in the North American session. It recovered to the CAD1.3980 area. It is consolidating so far today between about CAD1.3945 and a little more than CAD1.3980. Tomorrow, Canada reports the October employment. After losing 68.3k jobs in September, the median forecast in Bloomberg’s survey is for a 15k increase in October.

• The Australian dollar missed posting a potential key upside reversal yesterday by settling a couple of hundredths of a cent under Tuesday’s high. The September trade surplus, reported earlier today, was twice as large as expected, and the Australian dollar traded to $0.7025, slightly above yesterday’s high. So far, it is the first day this week tht the Aussie has not traded below $0.70000. The week’s high was seen Monday, a little below $0.7040.

• In the first three sessions of the week, the Mexican peso has swung in a wide range and both words are key. The dollar’s range has been around 30 centavos or more. It was around half as much last week. But it has been in a range. It found support Monday and Tuesday a little below MXN18.53, and a little higher yesterday. It found resistance Tuesday and Wednesday near MXN18.87. So far, today the greenback has been trading in the lower end of yesterday’s range, or roughly MXN18.54-MXN18.6750. We have suggested a break of MXN18.50 would boost confidence a high is in place.

• The one-way appreciation of the yuan has been broken. It has weakened for the past two sessions. The dollar reached CNH6.6855 yesterday after bottoming Monday, near CNH6.6425. The US dollar is trading in about a CNH6.6650-CNH6.6750, which is inside yesterday’s range. The PBOC set the dollar reference rate at CNY6.7156 (vs. CNY6.7180). It was the first time this week that the dollar’s reference rate was lowered.

• The drop in oil prices and the rally in Indian equities initially lifted the rupee to its best level in two weeks, though gains were trimmed in late turnover. The dollar gapped lower. It opened below INR94.36 and closed the gap in late turnover, rising a little above yesterday’s low (~INR94.50) before settling near INR94.4750. The 200-day moving average is near INR94.2240, and the greenback has not settled below the moving average since early July 2025.

Other Markets

• US equity indices gapped higher yesterday, contrary to the losses in the futures market as US midterm election results rolled in. The Dow rose by about 3% and filled an old gap left on the charts from early September. The S&P 500 closed last week’s gap and frayed the 20-day moving average (~7700 today) but settled below it. The Nasdaq composite gapped higher but stopped slightly short of the gap created last Friday, which extends to 26053. The Philadelphia Stock Exchange Semiconductor Index settled 3.1% lower, its fourth loss in the past five sessions. Outside of South Korea’s Kospi (-5.3%) and Taiwan’s Taiex (-3.2%), most of the other bourses in the Asia Pacifici region rallied. Japan’s Nikkei 225 fell but country’s other indices (Topix +1.1% and Nikkei 400 up 1.35%). Hong Kong’s Hang Seng led the region with a nearly 3.7% surge. After yesterday’s 1.8% advance, Europe’s Stoxx 600 is up nearly 0.5% through the European morning. The Nasdaq 100 futures are off by almost 0.5% while the S&P futures are firm, and the Dow futures are up about 0.5%. The talk continues to investor rotation.

• Benchmark 10-year yields tumbled yesterday in Europe and the North America, and the Asia Pacific region caught up today, with 4-7 bp declines. European 10-year rates fell 9-17 bp in the periphery, including France, and the 10-yr Gilt yield fell 13 bp. Core yields were off 3-6 bp. Yields are softer today, and despite large demonstrations in France, the French 10-year premium over Germany has fallen below 150 bp for the first time in nearly three weeks. European rates are off 1-5 bp. The 10-year US Treasury yield is slightly below 4.88%. It traded below 4.84% today, its lowest yield in nearly two months. The US Q4 refunding announcement was as expected, at a steady $125 bln, which still leaves the door open to more short-term issuance.

• Gold jumped around 3.25% yesterday. It reached slightly above $4070, its best level in a week. Follow-through buying has lifted it to almost $4147 today, its highest level since October 20. Barring a sharp pullback, gold is poised to settle above its 20-day moving average (~$4075) for the first time since September 3. Silver’s 4.8% rally was its largest rally in more than two months. It reached almost $52.50 yesterday and continued to almost $53.50 today. Its 20-day moving average is around $55, which it has not traded above since late September.

• Last Friday, December WTI reached almost $105. Yesterday’s 8.25% drop brought it to almost $87. Last month’s low was $86, which also corresponds to the halfway mark of the rally from early July low (~$67) to last week’s high $105). The contract made a marginal new low today near $86.65 before recovering in Europe to about $88.80. Intraday momentum indicators are stretched ahead of the North American open.

Data

• US Q3 productivity and unit labor costs, like some other economic concepts like r*, are not observed directly by rather deduced from other phenomenon. Productivity and unit labor costs are derived from the GDP report. The stronger growth in Q3 points to higher productivity (~1.7% vs 1.4%) and lower unit labor costs (~0.4% vs. 1.2%). The October Challenger job cut estimate may draw some attention, as will weekly jobless claims, but the more important signal is from tomorrow’s employment report, which is expected to see a doubling of net job creation to around 65k from 29k in September.

• Mexico reports some August capex data and October consumer confidence, but the highlight is the central bank meeting, where the extended pause is expected to continue. The overnight rate target will likely remain at 6.5%.

• The eurozone reported a sharp jump in September PPI. The 2.5% monthly increase is the third consecutive acceleration and is the most since the 3.4% jump in March following the war in Iran that began at the end of February. The year-over-year pace reached 11.1%, the highest since February 2023.

• Germany’s factory orders, like the US durable goods orders, tends to be a volatile series. German factory orders surged 4.4% in September after a 10.6% drop in August. Orders for auto and auto parts were particularly strong, rising 10.5%. Foreign orders for autos and auto parts jumped 12.3%. Despite the infrastructure spending, German’s construction PMI in October stood at 41.6 (43.5 in September). It has not been above the 50 boom/bust level since the end of last year. December 2025 reading of 50.3 was a bit of a statistical fluke. It was the only time last year a print above 50, and the only time it has been above 50 since Russia invaded Ukraine.

• The UK construction PMI remained below 50, as well in October. It was last above 50 at the end of 2024. It had improved in September (46.1) but fell back in October (43.6). However, today’s highlight is the Bank of England rate hike that had been well telegraphed. Although the vote was not unanimous (7-2), the swaps market is confident that today begins a sequence of rate hikes of about one a quarter through the end of next year.

• Australia’s September goods trade surplus was reported today, well above expectations at A$2.8 bln. Last September, it was nearly A$3.5 bln. Australia’s trade surplus trended lower this year through Q3. In the first nine months of last year, the average monthly surplus was about A$4 bln. This year’s average is around A$1.27 bln. Exports, however, have risen a little faster than last year. In the first three quarters of 2025, Australia’s exports rose by an average of 0.5% a month and this year the average is closer to 1.2%. Imports rose by an average of 0.6% a month in the Jan-Sept 2025 period and almost 1.3% in the first nine months of this year. Chips and server imports (from China, South Korea, and Taiwan) and energy costs are important drivers. Australia’s trade deficit with China reached A$101 bln in the first three quarters of the year, a new record.

• Japan's final October services and composite PMIs were a little softer than the preliminary estimates. The services PMI is at 51.7 rather than 52.0. The composite is at 52.1, not 52.3. The services PMI was at 53.1 last October and composite stood at 51.5.

Disclaimer

Election-Inspired Dollar Setback may be Buying Opportunity Ahead of Friday's Employment Report

noreply@blogger.com (Marc Chandler) — Wed, 4 Nov 2026 06:12:35 -0500

The US election results initially spurred a sell-off in tech shares as Democrats may be more interested in regulating AI than the current administration, and local initiatives on ballots seemed overwhelmingly to support limits on the data center build out. That said, the amount of territory or percentage of data center plans seem relatively modest. While equities have recovered, the dollar remains broadly lower. The intraday momentum indicators are stretched, and the greenback has begun consolidating after session lows were recorded in the European morning.

The dollar’s drivers, including the outlook for Fed policy and the economy, are likely to be more supportive over the next 48 hours or so. The US sees the ADP private sector jobs estimate today, alongside the final services and composite PMI, ISM services, and the September trade balance. Several Fed officials speak tomorrow and Friday, and those that have spoken recently seem to support a rate hike next month. And then on Friday, is the October jobs growth is seen a little more than 60k, which would be better than the three-month average.

Prices

G10

• The euro consolidated yesterday in about a third of a cent range above $1.1175. The response to the US election results saw it reached nearly $1.1265 in European morning, even as tech stocks recovered from the initial drop. The five-day moving average is poised to move above the 20-day moving average today or tomorrow for the first time since mid-September. Options for 1.35 bln euros at $1.1250 expire today. A convincing above the $1.1270 area could signal scope for another cent gain. Initial support now is seen around $1.1220.

• The yen fell to nearly a three-week low yesterday, when Japan was on holiday. The greenback settled above the 200-day moving average, which comes in slightly above JPY158.60 today. The dollar poked slightly above JPY158.75 yesterday. It held today and the dollar was sold to nearly JPY157.40 initially. It recovered to around JPY158.40 in the European morning. The intraday momentum indicators are stretched.

• Sterling settled slightly firmer but sufficient to post its high close since mid-September. Still, it traded within Monday’s range and was mostly confined to about a third of the cent above $1.34. It has been bid to $1.3500 today, its highest level since mid-September. Barring a reversal, sterling will also settled above its 200-day moving average for the first time since then, as well. The $1.3470 area corresponds to the (61.8%) retracement of the decline from the August high (~$1.3675). The intraday momentum indicators are stretched. Initial support now is seen in the $1.3450 area.

• The US dollar rose to a three-day high against the Canadian dollar yesterday, slightly below CAD1.4010. It settled near session highs recorded late day. The US two-year premium over Canada widened for the third consecutive session. It is the longest such streak in a month. However, the US dollar has come back offered and is already posting an outside day. The close is important, and settlement below CAD1.3940 could spur a move toward CAD1.3885-CAD1.3900.

• The Australian dollar was sold to almost $0.6960 yesterday, an 11-session low, and the (61.8%) retracement of the rally from mid-October. The market suspects the central bank’s fifth hike is the last. Inflation is still firm, but the weakness seen in some data if sustained could help moderate price pressures, and of course, full impact of this year’s aggressive hikes has still to be felt. The Aussie is recording a key upside reversal today by initially recording a new low for the move (~$0.6955) before recovering through yesterday’s high (slightly above $0.7005) to approach $0.7025. The intraday momentum indicators are over-extended.

• The Mexican peso gave up Monday’s 1.1% gain and more yesterday. The peso fell by about 1.4% yesterday. The data disappointed but it seemed like an outsized loss is that was the culprit. September worker remittance fell by more than expected but were still a handsome $5.36 bln and nearly $150 mln more than a year ago. Recall, too, that in September, the peso fell by 6.3%. The dollar initially edged slightly above yesterday’s high (~MXN18.8670) and reached MXN18.87 before it was sold back below MXN18.58. A break of MXN18.50 would boost the chances a top is in place.

• The market thinks the PBOC sent a signal that pushed back against further one-way appreciation of the yuan. The dollar rose by about 0.35% against the offshore yuan yesterday, its first gain since October 14. The greenback rose to CNH6.6855 today, its highest level since October 19. The PBOC set the dollar’s fix higher for the third consecutive session today (CNY6.7180 vs. CNY6.7150 yesterday). It matches the longest streak since June.

• The dollar was sold to a nine-day low against the Indian rupee initially today (~INR94.5025) and recovered to INR94.8725 before it consolidated. It settled slightly below INR94.65.

Other Markets

• After Monday’s shellacking, the Nasdaq Composite and S&P 500 bounced back by a little more than 0.85% and 0.35%, respectively. Hong and Chinese stocks rallied amid reports that officials will support Chinese equities. Taiwan and South Korea were mixed, but the latter dropped 4% before recovering fully. Japan’s Nikkei 225 was sold below the 200-day moving average for the first time since mid-2025 before it recovered and settled back above it. Europe’s Stoxx 600 is up almost 1.2%, which it sustained, would be the largest gain in three months. US index futures are up over 1%.

• The US 10-year Treasury yield fell slightly below 4.87% on Monday, its lowest level since September 10. It recovered to almost 4.97% yesterday and settled slightly below 4.95%. Outside of Japan, where the 10-year JGB yield rose four basis points to 2.8%, other benchmark yields are lower today. Rates are mostly 2-6 bp lower in Europe and the French and Italian premiums over German continue to narrow. The 10-year Treasury yield is off a 3-4 bp to straddle the 4.93% area.

• Gold consolidated yesterday mostly within Monday’s range, which itself was within the range set before the weekend. It has broken higher out of the consolidation and reached nearly $4050 today, a four-day high. Last week’s high was slightly above $4082, and the 20-day moving average is closer to $4075. Silver recovered after setting a new low for the year (~$48.60). It reached a little more than $50.50 in the North American morning before it was pressed back to almost $49.50. It has rebounded to $52.25 today but is consolidating a little below $52 in late European morning turnover.

• The prospect of a US-Iran agreement held drive December WTI from a contract high before the weekend (~$105) to yesterday’s low near $93.50. Iran seemed to play down the story. Still, Dec WTI settled slightly lower yesterday, less than $0.40 softer, and below the 20-day moving average for the second consecutive session. The contract is consolidating today, with a heavier bias.

Data

• The US Treasury will announce its quarterly refunding plans amid expectations that the 20-year may be dropped entirely and the sales of the 30-year may be trimmed. The September trade balance, final October service and composite PMI are due alongside the ISM services Index. The US trade deficit has averaged -$69.6 bln a month in the first eight months of the year. It compares with an $86.9 bln monthly deficit in the Jan-Aug 2025 period, when there was a significant attempt to front-run US tariffs. The average trade deficit in the first eight months of 2024 was about $68.7 bln. The Atlanta Fed GDP tracker is 3.2% for Q4 and the median forecast in Bloomberg’s survey is for 2.1%.

• Canada reports September merchandise trade and the October services and composite PMI. Both were below 49.0 in September. Canada’s trade balance has shown marked improvement this year. The average monthly balance has swung from a C$3.47 bln deficit to C$1.6 bln surplus this year. The August surplus of C$4.2 bln was the largest since May 2022.

• Brazil’s central bank meets today. It has cut rates five times for 125 bp this year (to 13.75%) and while the cycle is not over, it will likely stand pat today. Mexico has cut rates twice this year, but not since May. It will likely keep the policy rate steady at 6.5%.

• The eurozone final services PMI stands at 51.4 (51.7 flash and 53.0 in September, the high for the year). The composite PMI is at 51.7 (51.9 flash and 53.1 September, which is also the cyclical high.

• The UK’s final October services and composite PMIs were a little softer than the preliminary estimate. The services PMI is at 52.8 (53.1 preliminary and 52.1 in September), and the composite PMI is at 52.9 (53.1 preliminary and 52.0 in September). The market is confident that the Bank of England will lift the base rate tomorrow to 4.0% from 3.75%. The swaps market has three more hikes discounted through the end of Q3 27.

• Sweden’s Riksbank delivered the first hike in the cycle earlier today. Its policy rate now stands at 2.0%. The swaps market is discounting another hike in Q1 27. The market is discounting around 100 bp of hikes next year. Norway’s Norges Bank meets tomorrow. The central bank hiked its deposit rate to 4.25% in May. Pricing in the swaps market suggests expectations for it to be on hold next year.

• Australia’s final October services PMI is at 48.2 (47.8 preliminary and 51.9 in September). It was the third consecutive monthly weakening and the first sub-50 reading since May. The final composite is at 48.5 (47.7 preliminary estimate and 51.3 in September). It is the weakest since March. Separately, Australia reported a 0.6% rise September’s household spending after August was revised to a 0.1% decline from an initial flat estimate. Given the base effect, the year-over-year rise in household spending is likely to moderate going forward. It peaked at 7% in July and stood at 6.8% in September.

• China’s RatingDog October services and composite PMIs were reported earlier today. The services PMI fell to 50.8 from 51.6. It peaked in May at 54.4. The composite PMI also slipped—52.0 from 52.4. It also peaked in May (54.0) and was at 51.8 in October 2025.

Disclaimer

Surplus: The History of Too Much and the End of Economic Primacy

noreply@blogger.com (Marc Chandler) — Tue, 3 Nov 2026 08:31:36 -0500

Surplus: The History of Too Much and the End of Economic Primacy

The Puzzle

The United States carries more than $40.5 trillion of debt. Neither party has the appetite to address it. Yet adjusted for inflation, real interest rates remain subdued. While nominal yields are near multi-decade highs, real yields are modest. The US 10-year yield is a little below 4.95% now, and US CPI was 3.7% in September.

Scarcity cannot explain this. There is too much capital chasing too few outlets, and that is the argument of Surplus. The S&P 500 could fund the entire $5.2 trillion AI build-out with about 2.5 years of profits. Buybacks happen not because senior executives are generous; US corporations are now net lenders. Return the hot potato, the surplus capital to investors. Let them figure out what to do with it.

Politics and Economics Rejoined

Harold Lasswell, a founder of modern political science, defined politics as "who gets what, when and how." To the modern ear that sounds like economics.

It should. The book belongs to a tradition that treats the two as inseparable. Economics is not a value-neutral metric standing above politics. It is value-laden and grounded in society.

My book offers an accessible reframing of both.

Three Economies, One Condition

Agricultural surplus made industrialization possible. Industrial surplus made possible the surplus of capital itself.

Most observers treat surplus as a special case: state planning in China, or overcapacity in steel and autos. But it is the general condition, I argue. Capitalism has become victim of its own successes.

The American surplus, along with the portion of the world's excess savings that US firms manage, flows into financial markets liberated since the 1980s. Japan has exported its surplus for decades, less as goods than as savings. China reinvests its surplus in industrial capacity and exports goods.

Three economies, three channels, one phenomenon.

Beyond Scarcity

Capitalism creates values and interests, not only goods and services. Think of Abraham Maslow's hierarchy of needs. After decades of relative peace and prosperity across North America, Europe, and much of Asia, the basic needs of many are met. Other needs and interests have emerged.

National security, the environment, and social justice have grown more salient. They challenge the primacy we have given economic values for a couple of generations.

Freedom and Equality

My deepest interest is freedom and equality.

I return to the classic meaning of freedom that inspired the American founders: the right to participate in shaping the community in which one lives. In recent decades it has been narrowed to liberty, which means property rights.

I tested this at New York University's Center for Global Affairs, where I taught for many years. I asked students to imagine that the government decided tomorrow there were too many breakfast cereals, and that from now on there would be three: one that gets soggy in milk, one that does not, and a healthy granola. How many would feel less free?

Every semester, an overwhelming majority said they would.

Freedom had become the menu. Choice among goods is mistaken for self-determination.

An Old Conversation

I am continuing another dialogue that began long ago, with Keynes's The End of Laissez-Faire (1926) and Peter Drucker's The End of Economic Man (1939). Neither granted capital special powers. It was a factor of production, subject to the same forces as any other.

The End of Economic Primacy, the book's subtitle, takes the next step. Capital has reached the point other goods and services reached: diminishing marginal utility. When there is enough, the next unit is worth less, and the next less again.

Drucker showed how economic despair feeds authoritarianism. I worry that the pendulum swung so far toward liberty that it undermined equality. A profound sense of unfairness now cuts across demographics, income levels, and national frontiers.

Surplus is published by Prometheus today, Election Day. It is not coincidental. The election itself speaks to a critical theme of the book: The top 100 Americans' share of federal election spending has risen from 0.25% in 2000 to 7.5% in 2024.

The Question Surplus Asks

For three centuries, economics asked how to produce more. It was the right question while scarcity ruled. Keynes anticipated the "economic problem"(scarcity) would be solved by 2030. We have conquered scarcity ahead of schedule, as it were. Now what?

We can produce more than the arrangements built to distribute it can absorb. The surplus is not the problem. It is the evidence that the old question is spent.

A society that can make everything but cannot say what it is for will fill the silence with the only language it has left: price. That is how a breakfast aisle comes to stand for freedom.

The new question is political, as it always was. Who belongs? Who is us? What does membership guarantee? What can we give each other when there is enough?

We are not short of capital. We are short of answers. Surplus is the history of how we got here, and the argument for what comes next.

We either find a new synthesis of freedom and equality, or we will surely face the demons Drucker saw.

Order today: https://www.globepequot.com/9781493096657/surplus/

Disclaimer

The Greenback is Mixed as Americans Vote; Aussie Sold after RBA Signaled Its Fifth Hike may be its Last

noreply@blogger.com (Marc Chandler) — Tue, 3 Nov 2026 06:45:21 -0500

The US dollar is mixed today, as Americans vote in the midterm elections. There does not seem to a robust pattern for the dollar around the midterm elections, but the S&P typically does well in the fourth quarter of the mid-term year, and with even more regularity, the S&P rallies in the third year of a presidential term (2027).

There have been two notable developments today. First, as anticipated, the Reserve Bank of Australia delivered its fifth hike of the year today, and encouraged market speculation that the tightening cycle is over. The Australian dollar, which has been buoyed by the tighter monetary policy, is the weakest of the G10 currencies today, off nearly 1/3 of 1% to its lowest level in a little more than two weeks. Second, the PBOC announced an increase reserve requirement for foreign currencies. This, coupled with the first back-to-back increase in the dollar’s fix in a little more than a month, suggests a period of consolidation may be at hand.

Prices

G10

• The euro peaked in early European turnover yesterday, slightly above $1.1235. Sellers in North America brought it back to a little below $1.1190 in late dealings. It is trading quietly between almost $1.1175 and nearly $1.1210. Yesterday’s low was closer to $1.1150. Options for almost 2 bln euros expire today at $1.12.

• The dollar was confined to roughly JPY157.60-JPY158.00 against the yen yesterday and almost $900 mln of options at JPY158 expire today. Japanese markets are closed for a national holiday today, but the greenback reached JPY158.30 in Europe morning, a four-day high today. In the bigger picture, the dollar is mired in a sideways range against the yen. It settled once above JPY158.50 since September 24 and twice below JPY157.00 last month.

• Sterling, which reached almost $1.3440 in early European trade yesterday was confined to a narrow range around $1.3420 throughout the North American session. Options for almost GBP525 mln at $1.3410 expire today. The 200-day moving average was frayed for the second consecutive session, it has not settled above it since mid-September. Sterling has been confined to a little more than a quarter of a cent above $1.3395 today and stalled near the 200-day moving average, found near $1.3225 today.

• The US dollar recorded traded slightly above the pre-weekend high (~CAD1.3990) against the Canadian dollar in late dealing yesterday. Recall that the CAD1.3965 area corresponds to the (61.8%) retracement of the US dollar rally from the September 8 low (~CAD1.3760). It was first tested on October 23, though before last weekend, it reached almost CAD1.3940. It has been turned down from nearly CAD1.40 today and is probing the CAD1.39650 area. A break of last week’s low could spur a test on the CAD1.3890-CAD1.3900 area.

• The Australian dollar slipped settled below $0.7000 yesterday for the first time since October 19. The central bank delivered the widely expected hike, but the 6-3 decision, a less hawkish statement, and comments by Governor Bullock boosted market leanings that with many seeing it as the last hike in the cycle. The Aussie is the weakest of the G10 currencies today, off a little more than a third of a one percent. It has been sold to almost $0.6960, the (61.8%) retracement objective of the bounce from the October 15 low, slightly below $0.6900.

• The Mexican peso rose by about 1.1% yesterday. That was its strongest advance since April. The price action looks like a top has been forged, but a convincing break of the MXN18.50 area would boost our confidence. The 20-day moving average is near MXN18.51, and the greenback has not settled below it since mid-September. The dollar is consolidating quietly so far today between about MXN18.5525 and MXN18.6070. Brazil’s central bank meets tomorrow and is expected to stand pat, with the Selic rate at 13.75%. Mexico’s central bank meets on Thursday, and it is expected to keep its overnight rate target steady at 6.5%.

• The dollar settled below CNH6.65 against the offshore yuan for the first time since May 2022. The greenback has not settled high against the offshore yuan since October 14. The PBOC’s announcement that starting in the middle of the month, the foreign exchange reserve requirement ratio would be raised by 2 percentage points to 6%. This coupled with the slightly higher dollar fix (CNY6.7150 vs. CNY6.7146 yesterday), which was the first back-to-back increase since late September, Beijing appears to have signaled a new phase in the management of the yuan. The dollar jumped to about CNH6.6755 against the offshore yuan after it settled near CNH6.6475 yesterday. The CNH6.6780 area holds the 20-day moving average, and the greenback has not traded above it for nearly a month. Above there CNH6.70 looks reasonable.

• The Indian rupee strengthened today for the third consecutive session. Yesterday’s slide in oil prices may have been a catalyst. The dollar fell to an eight-day low near INR94.6125 before recovering to settle a little below INR94.75. We note that Indian equity indices were the best performers in the Asia Pacific region today.

Other Markets

• The Nasdaq Composite’s stunning downside reversal cast a pall over today’s equity market. After entering the gap created by last Friday’s sharply lower opening but not filling it, the Nasdaq Composite tumbled from almost 25800 to 25145 in late turnover and settled below the pre-weekend low (~25177) The 200-day moving average is near 25064 today. It has not traded below it in seven months. It settled yesterday, down slightly more than 9.25% since the record on October 6. SOX, the semiconductor index, settled ~3.4% lower for the third consecutive session. It is off almost 12% over the past three sessions and settled below the 200-day moving average for the second straight session for the first time since May 2025. Outside of Hong Kong, Australia, New Zealand, and India, the other large bourses in the Asia Pacific region fell. Europe’s Stoxx 600 is off around 0.3% after advancing about 0.4% yesterday. Nasdaq 100 futures are firm (~0.3%), but the S&P and Dow futures are trading with a heavier bias.

• With the help of a large drop in oil prices, benchmark 10-year yields fell yesterday. European rates were mostly 3-9 bp lower, and peripheral premiums over Germany narrowed. The French 10-year premium settled near 175 bp on October 22 and yesterday approached 160 bp. Italy’s 10-year premium settled near 125 bp on October 22 and settled around 113 bp yesterday. However, Asia Pacific bonds played catch-up, European yields have risen 3-5 bp today and the peripheral premiums are a little wider. The 10-year Treasury yield is also a little firmer and near 4.92%.

• Gold was tarnished by almost $147 an ounce before the weekend and recovered a little less than $70 yesterday. It briefly traded above $3970 yesterday after settling on the lows for the year at the end of last week (~$3870). It is trading heavier today and is straddling the $3900 in late European morning turnover. Silver was somewhat less impressive. It recovered about $1.40 an ounce (to ~$50.50) after losing a little more than $3 before the weekend. It has been sold to a new low for the year today, near $48.60.

• December WTI fell by about $7.6 a barrel (~7.6%) yesterday. It settled near $96.50 after having approached $95. With yesterday’s losses, it met the (50%) retracement of the rally from the early October low (~$86). It was the sharpest drop in five months. Washington and Tehran appeared to signal willingness to pursue negotiations. European gas prices also fell sharply (~11%), the most since late July. However, there is a more skeptical attitude today and December WTI reached $98.70 in late European morning turnover.

Data

• While the US votes in the midterm elections, September JOLTS and factory orders will be reported while October vehicle sales will gradually trickle in. The Treasury will announce its quarterly refunding plans tomorrow amid expectations that the 20-year may be dropped entirely and the sales of the 30-year could be trimmed. The September trade balance, final October service and composite PMI are due alongside the ISM services Index also will be reported tomorrow.

• Switzerland reported a firmer than expected October CPI. The EU harmonized measure by 0.4% for a 1.6% year-over-year pace. It is the third consecutive monthly increase in the year-over-year rate, which is now at its highest level since the end of 2023. The swaps market favors a hike at the end of Q1 27, but it is not fully discounted until the end of Q2 27.

• As widely expected, the Reserve Bank of Australia lifted its cash rate target for the fifth time this year. The quarter-point hike brings the target to 4.85%. However, many suspect this is the last hike in the cycle, and the statement and official comments have encouraged such a view. The futures market implies an end-of-2027 rate of 4.69%. It was at 5% in late September and 4.82% in the middle of last week. New Zealand’s national election is this weekend. The two main parties are polling around 30%, suggesting that smaller parties may be key in what could be drawn out coalition talks. The Reserve Bank of New Zealand unexpectedly stood pat late last month, but the swaps market has 75 bp of tightening discounted in H1 27.

Disclaimer

What a Difference the Weekend Made

noreply@blogger.com (Marc Chandler) — Mon, 2 Nov 2026 06:41:30 -0500

What a difference the weekend made. There is a resilience today that was not seen at the end of last week. Questions over the Ai-meme, which drove the semiconductor index down 7.2%, have eased today, despite S&P cutting Meta’s rating outlook at the end of last week. Last week, France escaped a Moody’s downgrade, but at the end of the week saw its outlook cut by Fitch. At the end of last week, December WTI reached a contract high near $105. The reports suggesting that Washington will give the negotiations more time has pressured December WTI below $100, which appears to be one of the factors that may be behind the lower bond yields today.

The US dollar is mixed. Most European currencies are higher but the Norwegian krone, which might have been knocked back (~0.70%) by the pullback in oil prices. The dollar-bloc currencies and the Japanese yen are also weaker. Tomorrow is the US midterm election. There does not seem to be a strong statistical pattern for the dollar around the election. However, one of the most regular patterns is that the S&P 500 tends to do well in Q4 of the midterm election year, and the third year of a presidential term (2027) is the strongest year of the presidential cycle.

Prices

G10

• Softer than expected German inflation helped dragged the euro lower ahead of the weekend after being turned back from a four-day high near $1.1215. The euro was sold to almost $1.1135 before stabilizing. After a quiet opening today, the euro climbed in late Asia Pacific turnover and briefly traded above $1.1235 in the early European activity. Support now is seen in the $1.1180-$1.1200 area.

• The dollar recorded the session low against the yen ahead of the weekend in early North American activity, slightly nicking the JPY157 level. After rising for three consecutive sessions, the greenback has a three-day fall in tow coming into today. The dollar nearly covered its recent range in the last six sessions: It approached JPY156 on October 23 and peaked in the middle of last week near JPY158.35. The US dollar is trading firmer today and is knocking on the JPY158 area, where options for around $1.1 bln expire today. A move above last week’s high will likely run into offers in the JPY158.50-60 area.

• Sterling initially surged to nearly $1.3435 in early activity last Friday. It was the highest level since mid-September and frayed the 200-day moving average. The momentum stalled and session lows were recorded in the North American morning (~$1.3375). Sterling settled slightly below the (50%) retracement objective of the losses from the late August high (~$1.3675) that is found slightly above $1.34. Last week’s gains were extended to almost $1.3450 today before sellers emerged early in the European morning and pushed sterling back to almost $1.34. Support is seen in the $1.3380-$1.3400 area.

• The Canadian dollar strengthened ahead of the weekend. The Loonie did not seem distraught over the sharp equity losses. The US dollar was sold to almost CAD1.3940, the lowest level since mid-September. The weekly close was below CAD1.3965, a retracement objective, targeting the CAD1.39 area next. It is trading sides so far today, inside the pre-weekend range. Initial resistance is seen around CAD1.40.

• The Australian dollar was practically unchanged last week. It consolidated mostly between about $0.7015 and $0.7050. It did briefly trade a little above its 200-day moving average, which is nearly $0.7060 today. The Aussie is trading quietly with a lower bias ahead of tomorrow’s central bank meeting, where many expect the last hike of the cycle to be delivered. It was sold to around $0.7010 in Europe today. It has not closed below $0.7000 since October 19.

• The dollar was greeted by sellers ahead of the weekend after it made a new high for the year against the Mexican peso (~MXN18.9265). It fell to almost MXN18.7700 in the North American afternoon, even as the Nasdaq Composite and S&P 500 were making new session lows. This is the kind of price action often associated with topping patterns. The dollar’s losses have been extended to almost MXN18.70 today. While we may see a deeper pullback, it is not clear that a top is indeed in place. A break below MXN18.65 would be encouraging, and a push below MXN18.50 would boost confidence that a high is in place.

• The dollar briefly traded below CNH6.65 in Europe ahead of the weekend. The offshore yuan drifted lower through the North American afternoon. The dollar recovered to about CNH6.6540. It took another step down today and reached almost CNH6.64254. For the past five weeks, the PBOC has raised the dollar’s fix once a week. The fix was set at CNY6.7146 (CNY6.7138 before the weekend).

• The dollar fell for the second session against the Indian rupee. The greenback briefly traded below INR94.70, a seven-day low. Lower oil prices seemed like the most important catalyst. Still, the dollar settled little changed on the day (~INR94.90), and slightly above the opening level (~INR94.89).

Other Markets

• Asia Pacific and European equities shrugged off to some extent the headwind from the sharp losses in North America before the weekend. The Philadelphia Stock Exchange Semiconductor Index was chopped by 7.2%, the largest single day loss since June and the capped the fourth consecutive weekly decline that has seen in fall a cumulative 21%. The S&P 500 gapped lower and settled below 7600 for the first time since mid-September. The Nasdaq Composite also gapped lower. It reached its lowest level since the end of July. Both indices are trading higher in the futures market. Asia Pacific equities were mixed. While Japanese and Taiwanese equities fell, South Korea’s Kospi rose by 2.25%, and Shanghai and Shenzhen rose more than 1%. India’s indices rose almost 1.7%. After snapping a four-day rally before the weekend, the Stoxx 600 is up about 0.15% through the European morning.

• Benchmark 10-year yields were mostly lower in Europe before the weekend, though the 5.5 bp increase in France was an anomaly. Its premium over Germany widened by around nine basis points to 165 bp, narrower by a mere two basis points on the week, after it escaped a downgrade from Moody’s. Fitch cut France’s outlook to negative ahead of the weekend, but the French bonds are bid today and the premium over Germany is a couple of basis points narrower. UK Gilts are leading the decline in European rates today and are off nearly six basis points. The 10-year US Treasury yield briefly fell below 4.90% and settled a little more than 35 bp lower on the month. It is nearly 4.92% now.

• Gold and silver fell hard ahead of the weekend and new lows for the year were recorded. Gold was “devalued” by about 3.5% as its fell to $3876. It was the worst day for gold since the end of August. It steadied today and recovered to almost $3920 before sellers reemerged. It is now straddling $3900. Silver was beaten back around 5.8% before the weekend. It was the third consecutive decline, and silver fell by ~8.8% on the week. It posted its first weekly close below $50 since last November. It is consolidating today between about $49.40 and $50.50.

• December WTI reached almost $105 ahead of the weekend, a new contract high and settled firmly. Dec WTI rose for the fifth consecutive week last week and by about 18% in October. There have been numerous press reports playing up discussion in the Trump Administrations about re-escalating the conflict with Iran after Tuesday’s midterm election. Reports suggesting that the US may give the negotiations more time have weighed on oil prices, and Dec WTI is trading below $100. It traded below last week’s low (~$99.45).

Data

• The US sees the final manufacturing PMI. The preliminary reading was 56.0. It was at 55.9 in September and 52.5 last October. It has not fallen since June. The ISM manufacturing runs a little less hot. It was at 54.5 in September and may have ticked up in October, though new orders and employment may have softened. Lastly, with Q3 GDP out last week, today’s September construction spending is unlikely to grab much attention. Still, for the record, the median forecast in Bloomberg’s survey is for a 0.5% gain after a 0.9% increase in September.

• Canada’s October manufacturing PMI is due. It was at 51.5 in September. It has fallen two months in a row after peaking at 53.5 in July.

• Mexico reports its October IMEF surveys. They function like a local PMI. The highlight of the week is the central bank meeting on November 5. It is expected to stand pat.

• The eurozone’s final October manufacturing PMI is 52.7, a little above the flash estimate of 52.4. It peaked in September at 52.9, a cyclical high. Last October it was at 50.0.

• The UK’s final October PMI was confirmed at 52.8. This year’s peak was in April at 53.7. Last October it was 49.7.

• Australia’s manufacturing PMI peaked in January at 52.3. It chopped around a bit and were back at 52.0 in July and August before falling to 49.6 in September. It remained there in October. Melbourne Institute’s inflation survey ticked up to 4.9% year-over-year from 4.8%. It is a new high since the end of 2023.

• Japan’s final October PMI confirmed the flash reading of 53.3. It was the second consecutive slowing after reaching 54.9 in August. Last October, it was at 48.2.

• China’s “official” PMI was poor. The manufacturing, non-manufacturing, and composite PMIs all fell below the 50 boom/bust level. The manufacturing PMI fell to 49.3 from 50.1. The non-manufacturing PMI fell to 49.7 from 50.2, and the composite fell to 49.7 from 50.7. The RatingDog manufacturing PMI, reported today, slipped to 52.0 from 52.1. Although Beijing has announced some stimulus measures recently, and the change in the benchmark policy rate is tantamount to a small rate cut, pressure appears to be growing for more support.

Disclaimer

November 2026 Monthly

noreply@blogger.com (Marc Chandler) — Sat, 31 Oct 2026 06:55:23 -0400

The EU and China understanding was one of the highlights of October, but the China shock rolls on. The economic disruption from China's export drive continues. Even as the Chinese yuan gradually appreciates, the price competitiveness of many Chinese goods appears to be increasing.

Nor is the disruption from the United States going away, and it is not just about tariffs. Businesses and investors have learned to price the tariff headlines, however imperfectly. What is harder to price is the unexpected. The diesel deal with Russia is a case in point. It cut across stated policy, surprises allies, and reminds everyone that Washington's priorities can shift without warning. Planning is difficult when the rulebook is rewritten in real time.

AI Cracks

The AI investment ecosystem has been a significant contributor to growth in several economies; directly as in the US where AI investment has offset the decline in investment elsewhere and contributed to the wealth effect of rising equities. AI has also bolstered activity in other countries, including Japan, China, South Korea, Taiwan, and Mexico where exports of AI-related hardware have been strong.

Cracks in narrative materialized in October. The Philadelphia Stock Exchange Semiconductor Index fell a little, almost 15.5%. It is a volatile index, to be sure, and it is still up 50% this year after it rose 42% in 2025 and 19% in 2024. The South Korean equity market, where the production and export of AI hardware was a key driver, fell by a little more than 16% in October. Even with the pullback it is up nearly 36% this year and Taiwan's Taiex, which fell a more modest 5.7% in October, is up about 56% year to date.

The credit side of the AI narrative also has been challenged. Credit-default swaps, which are an insurance against default, have risen sharply in recent weeks. Pulling back initial public offerings, and lower stock and debt prices show the strain. While it may be too early to draw hard conclusions, the sector is worth monitoring by businesses and investors.

US Dollar Resilience Tested

In October, the greenback rose to new highs for the year against the euro, Canadian dollar, Brazilian real and Mexican peso Still at the end of the month, only two G10 currencies were lower: the euro, and the Danish krone that shadows it.

Rising interest rates had supported the dollar but, contrary to the conventional narrative about rising rates and the lack of buyers for US debt, US interest rates pulled back in October, and this seemed be a headwind for the greenback. After rising for six consecutive weeks through late September, the US two-year yield fell for the past five consecutive weeks. It fell by about 30 bp in October, the largest monthly decline since August 2025. The US 10-year yield rose five consecutive weeks through early October and has fallen for the past four weeks. The yield fell 35 bp in October, the most since December 2023.

Consider that in late September, the Fed funds futures implied an effective Fed funds rate of almost 4.85% at the end of next year and at the end of October, it is a little below 4.45%, the lowest since September 10.

Politics

Europe, meanwhile, struck a trade deal with China. That is notable, but the sums involved are small. The modesty of the agreement itself is a warning. If a headline deal amounts to so little, the broader issues in the relationship, including overcapacity, market access and the diversion of Chinese exports, have not been resolved. They have been postponed. Yet, the agreement will likely serve as a template for future agreements.

Europe has more than trade to worry about. Its pressing domestic issues continue to metastasize. Spain holds a snap election on November 29. In France, student-led protests make vivid television, but they hardly conceal the difficult budget choices and the murky political outlook. Germany's firewall to contain the AfD has cracked. The government has revised up this year's growth forecast, which is welcome, yet Chancellor Merz's tenure appears fragile. Better growth does not necessarily buy political stability.

The UK may be the most interesting. Prime Minister Burnham has changed the political debate. A decade after the Brexit referendum, he favors closer relations with the EU. Surveys suggest that if a referendum was held today, the "remainers" would win. Whether that is achievable is another matter, and it would take years. But the shift in what is thinkable is itself a development. For sterling and gilts, it adds a layer to a story already complicated by fiscal constraints and inflation that has proved stubborn.

Then there are the US midterm elections. Typically, the party in the White House loses seats. In all but two postwar midterms, it has. This year looks no different. The event markets favor the Democrats taking control of both houses of Congress and possibly securing a majority of governors.

Yet the policy implications are not clear. Will a Democratic Congress constrain the war on Iran? Will it check US unilateral action globally? Will it narrow the fiscal deficit? Divided government usually means gridlock, which may act more as a brake than a redirection. The president retains considerable room to act on trade and foreign policy, as the diesel deal shows. On the deficit, neither party has shown much appetite for restraint. That said, the third year of the presidential term (2027) tends to see the best S&P 500 performance of the presidential cycle.

Monetary Policy

Four G10 central banks meet in November. The Bank of England, the Reserve Bank of Australia, and Sweden's Riksbank are likely to hike rates. Norway's Norges Bank is probably on hold after hiking rates at its last meeting, in September. For investors, the message is that policy paths are diverging, and divergence tends to favor the currencies of the more hawkish central banks in the current environment. Australia and Norway have the highest policy rates in the G10 and have the strongest currencies this year.

Judging from the derivative markets, investors are confident that the interest rate cycle in the US, EMU, and Japan is not over. All three central banks are expected to hike in December. The tightening cycle is expected to carry into next year.

The upshot is that November offers plenty of event risk but few clean answers. The outcome that markets are leaning toward may matter less than what it turns out to mean.

Bannockburn World Currency Index

Bannockburn's World Currency Index is composed of the currencies of the dozen largest economies--half of which are from high-income countries and half from emerging markets. It edged slightly lower in October after falling nearly 0.40% in September. It was the first back-to-back monthly decline since last September and October. We anticipate further losses in the coming weeks, which is consistent with our anticipation of new dollar gains.

Among the G10 components, the euro was the and the yen weakened. The euro fell by nearly 1.5%. The yen recovered late in the month and settled less than 0.1% Together the two account for almost a quarter of the index. The Canadian dollar rose by nearly 1.9%, and Australian dollar rose nearly 1.2%, but combined, they have an index weight of around 4.5%.

The emerging market currency members of BWCI were mixed. For different reasons, both the Mexican peso and Brazilian real fell, nearly 4.0% and 5.2%, respectively. Brazil's election results surprised with the incumbent Lula pulling off a stunning victory in the run-off contest. Mexico was hit by unwinding of dollar-funded carry trades, a central bank that sounded a little dovish, and some glitches in the trade negotiations with the US. Together they account for a slightly less than 4.5% of the basket.

The Russian ruble's 3.4% appreciation in October made it the strongest performer in the Bannockburn World Currency Index. The South Korean won rose 1.7% and the Chinese yuan gained almost 0.8%. With the help a resolute action by Indian officials, the Indian rupee, it rose by a little less than 1%.

U.S. Dollar: The Dollar Index rose to a new high for the year in the middle of October near 103.00. It recorded a 3-4 month low in August and September around 98.60. It climbed alongside the US two-year yield and, with a lag, slipped lower as rates pullback back. Still, the Dollar Index showed resilience late in the month. It remained firm even as the two-year yield fell by around 20 bp in the last week and a half. Federal Reserve Chair Warsh appears to have signaled a gradualist pace of monetary adjustment even though the PCE deflator rose to 3.6% in September, its highest level since May, and the economy expanded by a stronger-than-expected 3.4% annual pace in Q3 (2.2% in Q2). Despite poor confidence measures and household debt stress evident, consumption rose at a 3.8% annual pace in Q3. However, real spending was flat in September, which is the weakest reading since January. Warsh recognized that financial conditions tightened since the September rate hike, but refrained from calling them tight, and despite Q3 growth being almost twice what Fed officials think is the non-inflationary pace, he said there were little signs the economy was overheating. A December rate hike still seems like the most likely scenario, barring a new shock. We have a constructive near-term outlook for the dollar and suspect there is potential for new highs in the Dollar Index.

Euro: The euro underperformed among the G10 currencies in October. It lost about a 1.6% against the dollar to bring the year-to-date loss to almost 5.1%. The euro recorded new lows for the year against the dollar, sterling and yen. Social unrest in several European countries and heightened anxiety over the French deficit/debt position weighed on the euro. The French 10-year premium over German was around 80 bp as recently as early August. It widened to almost 130 bp in September and reached, on a closing basis, nearly 175 bp in October. It may not have peaked. Italy's premium was also around 80 bp in mid-August. It rose to about 110 bp in September and 125 bp in October. Although tensions relaxed a little late in October following Moody's decision not to downgrade France (and bring its rating in line with S&P and Fitch) but the underlying social and fiscal issues have not been resolved. The European Central Bank has hiked rates twice this year (June and September) and is widely expected to hike again in December. The swaps market is pricing in the likelihood of another hike in 2027. Terms of trade issues and China's export push has seen the eurozone's current account surplus shrink by almost 10% this year through August. The ECB's staff projects the current account surplus to narrow from 1.7% in 2025 to 1.5% this year and next before returning to 1.7% in 2028. The broad approach that the EU used to slow the growth of China's EV imports will likely serve as a template for other sectors in the coming months. The euro approached the halfway mark of the rally from the 2025 low (near $1.0140) to this January's high ($1.2080). That retracement is near $1.1110. There may be psychological support around $1.10, but the next retracement is closer to $1.0880.

(As of October 30, indicative closing prices, previous in parentheses)

Spot: $1.1160 ($1.1255) Median Bloomberg One-month forecast: $1.1230 ($1.1380) One-month forward: $1.1175 ($1.1270) One-month implied vol: 5.8% (6.5%)

Japanese Yen: The US dollar spent most of October straddling the JPY158 area. The low for the month was recorded in late October near JPY156. For the first time this year, the core CPI, which excludes fresh food, edged above its 2% target. Still, the Bank of Japan was reluctant to hike rates in October after the September hike brought overnight target rate to 1.25%. The swaps market is pricing in about an 80% chance of a hike in December. Looking further out, we suspect the terminal rate will be around 2% in the second half of next year. The Japanese economy remains fragile. Annualized growth peaked in Q1 at 1.9% and moderated to 1.4% in Q2 and is expected to have slowed to 1.0% in Q3. The slowdown may persist through Q1 27. Rising yields at home and fiscal strains in France, coupled with the intervention a few months ago have encouraged Japanese investors to buy more domestic bonds and sell foreign bonds. In the 12 weeks since the end of July, Japanese investors sold foreign bonds in nine weeks for a cumulative sale of JPY1.87 trillion ($11.8 bln) compared with net purchases of JPY934 bln in the previous 12 weeks. Japan's unresolved political tensions with China may be beginning to bite. Tokyo has asked the US to intercede on its behalf to get Beijing to allow exports to several critical metals to Japan, including yttrium, a heat-resistant metal that is critical for chips, vehicles and jet engines. It is used to coat engines and plasma-etching equipment used for the fabrication of chips. The US defense supply chain relies on components with yttrium that are made in Japan. It may come to a head late this year or early 2027.

Spot: JPY157.55 (JPY157.85) Median Bloomberg One-month forecast: JPY157.25 (JPY157.00) One-month forward: JPY157.20 (JPY157.45). One-month implied vol: 7.3% (9.1%).

British Pound: The modest tax and spend budget presented in late October failed to capture the potential of transformative government's vision. Labour's selection of Burnham to replace Starmer has boosted the party in the polls at the same time that the Reform Party has lost some luster amid investigations into undisclosed donations and potential foreign-funding violations. In fact, Burnham's popularity and support for Labour has spurred talk of an early election, which the prime minister has played down. In light of the shift in US policy, European security vulnerabilities, and the under-performance of the British economy over the past decade, Burnham has re-opened the Brexit debate and has explicitly and unabashedly endorsed rejoining the EU. The UK and EU hold a summit on November 20, but Burnham recognizes the need for a proper popular mandate and does not want to get too far ahead. The Bank of England meets on November 5. The market is confident, and even before the budget, a tightening sequence will be initiated. The BOE has not raised rates since August 2023. It had cut the base rate by 150 bp starting in August 2024 through December 2025. After this hike, the swaps market is pricing in three more hikes by the end of H1 27. Sterling fell by 2.1% in September, and after making a new low for the year in mid-October, it recovered to settle about 0.80% higher in the month. However, we suspect sterling's bounce three-cent bounce in the past two-and-a-half weeks has nearly exhausted the move and move back to the $1.3280-$1.3300 area is likely after peaking at the end October near $1.3435, which frayed the 200-day moving average.

Spot: $1.3390 ($1.3240) Median Bloomberg One-month forecast: $1.3345 ($1.3300) One-month forward: $1.3395 ($1.3245) One-month implied vol: 5.6% (6.4%)

Canadian Dollar: The loss of full-time positions in August and September seemed to dash hopes that the Bank of Canada could hike rates at the end of October and close the historically wide policy gap with the US. However, Bank of Canada Governor Macklem gave a hawkish speech in mid-October and the market responded accordingly. The swaps market adjusted and discounted around an 85% chance of a hike before it was delivered on October 28. It was the first hike since June 2023. The market has at least two more hikes priced in by the end of H1 27. Between the war in the Middle East and the trade tensions with the US, price pressures have risen and growth has slowed. The central bank forecasts a 0.7% expansion this year after nearly 2% growth in 2025. It expects CPI to pick up to 2.5% from 2.1% last year. The external sector has improved markedly this year. Through August, Canada recorded an C$8.5 bln goods trade surplus compared with a C$20 bln deficit in the first eight months of 2025. At the same time, foreign investors boosted their holdings of Canadian bonds and stocks. In the first eight months of the year, foreign investors bought C$161.6 bln of Canadian financial assets, almost six-times more than in the same year ago period. The US dollar rallied persistently against the Canadian dollar in September and in the second half of October, unwound more than 60%. It recorded the year's high near CAD1.43 in the middle of October and fell to nearly CAD1.3950 at the end of October. The next target is around CAD1.39.

Spot: CAD1.3975 (CAD 1.4250) Median Bloomberg One-month forecast: CAD1.3985 (CAD1.4120) One-month forward: CAD1.3955 (CAD1.4230) One-month implied vol: 4.2% (4.4%)

Australian Dollar: The Australian dollar tested the $0.6900 area in early October and again in the middle of October. It recovered from the three-month lows and began re-building support near $0.7000. The double bottom projects toward $0.7100, which corresponds to a retracement objective of the losses since the September high near $0.7240. The Australian dollar rose by about 1.2% in October after falling a little more than 3% in September. That puts the Aussie up about 5.1% year-to-date and makes its the second-best performing G10 currency behind the Norwegian krone's nearly 9.2% gain. After hiking rates four times this year, Australia's policy rate of 4.6% is the highest among the G10. The Reserve Bank of Australia meets on November 3, and some hawkish comments have put the market on notice that the tightening cycle is not over. The futures market has around an 80% chance priced in that a hike will be delivered. Still, given the strains emerging in the Australian economy (falling house prices, rising unemployment, and the preliminary October PMI slumping below the 50 boom/bust level, the market anticipates this will likely be the last hike in the cycle.

Spot: $0.7030 ($0.6955) Median Bloomberg One-month forecast: $0.7070 ($0.7010) One-month forward: $0.7025 ($0.6950) One-month implied vol: 6.7% (8.0%)

Mexican Peso: The Mexican peso was the worst performing emerging market currency in October. It fell about 4.1% against the US dollar. It had fallen by around 6.3% in September and was the first back-to-back monthly decline since the end of 2024. It has been hit by three forces. First, it handled the unwinding yen carry trades well as traders shifted to dollar-funded positions. However, the jump in US rates and the surge in the greenback hit the peso. Second, in an attempt to distance itself being tied to Federal Reserve decisions, the central bank's minutes appeared dovish. Third, the Trump administration is pressing Mexico hard to boost imports from the US and the trade talks have reportedly stalled. The dollar reached the almost MXN18.93 at the end of October, its highest level since August 2025. The move seems excessive, and we await some price development that suggests a high has been approached. Technically, the MXN19.00-MXN19.07 remains the risk. Mexico's central bank meets on November 5, and we expect the overnight rate target will be held at 6.50%.

Spot: MXN18.7855 (MXN18.1635) Median Bloomberg One-month forecast: MXN18.38 (MXN17.8470) One-month forward: MXN18.8240 (MXN18.2040) One-month implied vol: 12.1 (12.1%)

Chinese Yuan: The PBOC continued to signal acceptance of a gradual appreciation of the yuan. The yuan rose by about 0.8% in October, its largest monthly advance since May. Year-to-day, the yuan has appreciated by about 5% against the dollar and a little more than 10% against the euro. Given China's cost advantage, it still is too modest to do much about China's surplus, which has continued to grow and cause consternation among many of its trading partners. Through September, China's trade surplus is almost 8% larger than in the first nine months of 2025. China's export growth has been particularly pronounced in AI-related hardware, and hence more reliant on external technology demand. Domestic demand remains subdued, and even before Q3 GDP was reported (1.2% quarter-over-quarter, and 4.5% year-over-year), Beijing announced some measures that will ostensibly support the economy, like allowing provincial governments to access previously unused borrowing quotas. Beijing's tax break for exporters, estimated at about $300 bln a year, could be reduced or eliminated to help ease trade tensions. Separately, the PBOC announced several reform measures, including switching its policy rate to the overnight reverse repo from the nine-day reverse repo, which would bring it more in line with other major economies. Although it is more a plumbing issue, it looks to be tantamount to a modest rate cut. Lastly, the PBOC also adopted measures that are aimed at boosting the attractiveness of the onshore financial market, and Panda bond issuance this year has already exceeded last year's total.

Spot: CNY6.6545 (CNY6.7060) Median Bloomberg One-month forecast: CNY6.6700 (CNY6.7085) One-month forward: CNY6.6900 (CNY6.7265) One-month implied vol: 2.3% (2.3%)

Disclaimer

Greenback Dragged Lower by Questions of the AI Meme

noreply@blogger.com (Marc Chandler) — Fri, 30 Oct 2026 06:46:28 -0400

The US dollar is finishing the week offered. The proximate cause is the arguably softer rates and the as a result of new questions about the AI-meme, following the disappointing Amazon and Intel earnings news and guidance yesterday. This followed the robust Q3 US GDP report that underscore the significance of AI-related investment is fueling US growth (alongside consumption). The eurozone reported stronger than expected Q3 GDP but the pressures in the European peripheral bond market have not gone away. This week, the French 10-year premium is slightly more than six basis points wider, and the Italian premium has widened by about five basis points. At the same time, front month Brent and WTI futures contracts are at new highs. December WTI approached $105 and January Brent poked above $114.

The Bank of Japan completed this week’s central bank meetings, and as widely expected, left the overnight target at 1.25%. Like the Federal Reserve and the European Central Bank, the Bank of Japan is widely expected to hike rates in December. Five G10 central banks met this week and four more meet next week. The Reserve Bank of Australia and the Bank of England are most likely to hike. Norway’s Norge Bank is expected to stand pat, while Sweden’s Riksbank is the closest call and the swaps market favors a hike.

Prices

G10

• The euro rallied from a marginal new low for the year near $1.11 in the North American morning and reached almost $1.1185 in late turnover. It settled firmly (above Wednesday’s high). Technically, it posted a key upside reversal. It held mostly above $1.1175 today, and follow-through buying today lifted the euro to $1.1215, a four-day high. The week’s high, set Monday, was a little above $1.1225. Options for 3.6 bln euros expire today at $1.12.

• The dollar traded mostly sideways against the Japanese yen yesterday. It spent most of the session in about a quarter a yen below Wednesday’s settlement (~JPY157.85), and slightly less than a third of a yen above it. The dollar returned to session lows in late turnover after the reaction to Intel’s and Amazon’s earnings and guidance. The dollar was sold to almost JPY157.10 a four-day low, around the BOJ’s standpat announcement. It has not been above JPY157.45 in Europe. Options for $1.3 bln at JPY157 expire Monday.

• After having been sold to an eight-day low, slightly below $1.3275 on Wednesday, sterling caught a bid yesterday that lifted it to $1.3385. The dollar’s broad weakness boosted sterling slightly above $1.3430 today. It frayed the 200-day moving average, which is found around there, for the first time since mid-September. The next hurdle is seen in the $1.3470 area. Sterling is at a new high for the year against the euro. The euro fell to almost GBP0.8335 today. That is its lowest level since April 2025. UK 10-year Gilt yield fell a little more than three basis points yesterday. It settled below 5.30% for the first time since Sept 22.

• The Canadian dollar strengthened yesterday, and Canada’s two-year discount to the US narrowed. It is below 130 bp for the first time since mid-September. The greenback tested Monday’s low (~CAD1.3965), which is also the (61.8%) retracement objective of the rally from the September 8 low (~CAD1.3760). However, as the markets responded to Intel’s news, the US dollar recovered back to CAD1.3990. Still, the US dollar is trading with a heavier bias and is pressing below CAD1.3960 in European turnover today. A convincing break could signal a near-term move toward CAD1.39. The 200-day moving average is a little below there now but gently rising.

• The Australian dollar underperformed yesterday. It was the weakest among G10 currencies and gave back a little more than half of Wednesday’s 0.40% gain. It traded on both sides of Wednesday’s range but settled within, and a little below last week’s close, which was slightly above $0.7035. It is consolidating today in the lower half of yesterday’s range. Options for A$1.1 bln at $0.7025 expire today.

• After consolidating in the previous four sessions, the Mexican peso took another leg lower yesterday amid the broad decline of Latam currencies. The dollar rose to a new high for the year, a little above MXN18.89 and poked above MXN18.90 today. The next technical target is in the MXN19.00-MXN19.07 area.

• The offshore yuan reached its best level against the dollar since June 2022 today, slightly below CNH6.65. It has been 12 sessions since the yuan. The dollar is off around 0.85% this month, its largest monthly loss since May. Our CNH6.60 target is coming into view. The PBOC set the dollar’s reference rate slightly lower today (CNY6.7138 vs. CNY6.7147 yesterday. The Sept 30 fix was at CNY6.7351. Note that by switching policy rates from the seven-day benchmark that was at 1.4% to the overnight reverse repo rate, announced today at 1.25%, which looks like the easing of policy.

• India moved in the opposite direction. It announced an 81 bp increase in the floating rate (2034) bond. The Indian rupee rose by almost a third of 1% today, its biggest advance of the week. Still, the dollar settled near INR94.9550 compared with INR94.9425 a week ago. Yet, the monthly advance of around 0.9% is the best monthly performance since February.

Other Markets

• US equity indices traded heavily yesterday. The Nasdaq Composite settled slightly below opening levels while the S&P 500 settled slightly above. Today’s action was sparked by investors selling Amazon and Intel shares after their earnings and guidance, and this weighed on tech stocks today in the Asia Pacific region. Most bourses in the region fell. Japan’s Nikkei 225 was off 2.1%, Taiwan’s Taiex fell 2.5%, and South Korea’s Kospi dropped 3.5%. Hong Kong, Australia, New Zealand, and India were notable exceptions. Europe’s Stoxx 600 is falling for the first time this week. It is off about 0.25% so far today. The Nasdaq 100 futures are off around 2.3%, and S&P 500 futures are ~1% lower.

• Benchmark 10-year yields softened in North America and Europe yesterday. Two things stood out in Europe. French bonds underperformed in a falling rate environment. Second, UK Gilts were off almost 3 bp, with the yield ending yesterday at its lowest close since September 22. However, the two-year yields decline even more (bullish steepening) and there French premium over Germany narrowed by a couple of basis points. France pays about 50 bp more than Greece and almost 15 bp more than Italy to borrow for two years. European rates are mostly lower, with France (up 3 bp) and Italy and Greece (up almost 2 bp) are the laggards. The 10-year US Treasury yield moved a few basis points higher in the run-up the GDP release. The yield pulled back a few minutes after the release and trended lower to 4.93%, a marginal low for the month, in late dealings after the equity news. It is still there now.

• Lower interest rates did nothing to lift the spirit in the bullion market. Gold, which tested $4082.50 on Wednesday was back within a stone’s throw of $4000 (~$4007) in the North American afternoon. It made a new three-month low today near $3965. Since the low was made, gold has not been able cover back above $4000. Silver was tagged for around 3.5%. It has dropped by more than 12% in the seven sessions through today and is down more than 16% for the month. It traded below $50.50 for the first time since last November.

• December WTI consolidated yesterday inside Wednesday’s range (~$99.75-$103.55). With today’s gain to almost $105, the contract is up about 17.8% this month. According to AAA, average retail price of unleaded has fallen by about 20 cents a gallon this month through yesterday. It rose by about 7.8% in September.

Data

• The US finishes the week with Q3 Employment Cost Index. It includes direct costs, such as wages, salaries, and bonuses, and indirect costs benefits, such as Social Security contributions, taxes, and training costs. The four-quarter moving average peaked in 2022 at 1.25% and has slowed to 0.82% for the past three quarters. Many Fed officials acknowledge that labor costs are not contributing significantly to the price pressures.

• StatCan is expected to report that the Canadian economy expanded by 0.2% in August after a flat performance in July. That would be sufficient to lift the year-over-year pace to 1.7% from 1.4%.

• Mexico reports Q3 GDP. The economic momentum likely slowed after the 1.4% quarter-over-quarter expansion in Q2. If that is accurate, the year-over-year pace would have quickened to 3.0% from 2.1%. That would be the fastest growth since Q3 23.

• For its part, the eurozone growth slowed in Q3. The quarter-over-quarter pace was 0.4%, which is better than the 0.2% expected after it expanded by 0.6% in Q2. The year-over-year pace ticked up to 1.3% from 1.2%. Of note, the French economy unexpectedly contracted by 0.1%Separately, Germany, France, Italy, and Spain reported preliminary October CPI figures. German (states) and Spain saw less price pressures while France and Italy reported the year-over-year pace quickened.

• Australia’s private sector credit expanded by 0.6% in September, which matched the August increase. The year-over-year rate was steady at a robust pace of 8.4%. After the hawkish comments and firm CPI, the market will head into next week with around an 80% chance of a hike discounted, up from almost a 65% a week ago.

• The Bank of Japan left its overnight rate at 1.25%. The swaps market has about a little more than an 80% chance of a December hike priced. The BOJ updated its forecast. GDP this year is seen at 0.7 (vs.0.6%) and 0.7% next year (from July’s projection of 0.8%). Core CPI (excludes fresh food) is forecast for this year held steady at 2.5%, and next year’s stands at 2.6% (from 2.4%). Separately, Tokyo’s October headline CPI edged up to 2.8% from 2.7% while the core rate slipped to 2.6% from 2.7%. September retail sales surprisingly fell by 0.7% after falling a revised 0.9% in August (initially -1.2%). The preliminary September industrial production bounced back a stronger than expected 2.2% after falling 2.4% in August. Lastly, the unemployment rate slipped to 2.4% in September from 2.5%.

• China will report its October PMI first thing tomorrow. It is expected to have slowed, and the median forecast in Bloomberg’s survey projects the manufacturing PMI to slip below the 50 boom/bust level where it had been in July and August before rising to 50.1 in September.

Disclaimer

Gradualist Fed, AI Questions, and Slightly Firmer Greenback Ahead of ECB's Most Likely Stand Pat Decision

noreply@blogger.com (Marc Chandler) — Thu, 29 Oct 2026 06:43:19 -0400

The dollar is firmer than most of the G10 currencies today, in the aftermath of the FOMC meeting. Fed Chair Warsh repeatedly noted that tightening of financial conditions since the September rate hike. Yet, while recognizing that the tightening does not mean tight, the Federal Reserve stood pat. The market does not believe the Fed, nor have the markets tightened sufficiently to bring inflation to the target, which it has exceeded for six years. Warsh seems to have implied a more gradualist approach to the rate adjustment, though the market continues to recognize a strong chance (~85%) of a hike in December. Without waiting for his task forces to report, Warsh announced there would be seven, rather than eight, live meetings in 2027 and six in 2028. The other meetings will be devoted to strategy.

Attention turns to the today’s ECB meeting and tomorrow’s BOJ meeting. Neither is expected to change policy, but the markets expected rate to be hiked in December. Meanwhile, the earnings news from the AI ecosystem has been mixed. The Philadelphia Stock Exchange Semiconductor Index (SOX) has risen for the past four sessions and settled at a two-week high yesterday. The rolling 30-day correlation between changes in the SOX and Dollar Index turned positive in recent days for the first time since late July.

Prices

G10

• The euro tested the year’s low, recorded om October 14, slightly below $1.1115, near the (50%) retracement of the rally that began last February, near $1.0140. The euro recovered and reached new session highs, nearly $1.1170, during Fed Chair Warsh’s press conference. However, there has been no follow-through buying and the euro returned to $1.1125 in the European morning before recovering to around $1.1145. A break of $1.11, where options for almost 1.4 bln euros expire today, could spur losses toward $1.10 initially, but the next retracement is a little below $1.09.

• The dollar snapped a three-day advance against the Japanese yen yesterday. It reached a five-day high, nearly JPY158.35 after the Fed’s decision. The month’s high was recorded on October 14, slightly below JPY159, but came off in late dealings to settle a few ticks lower. The dollar is consolidating quietly today, ahead of tomorrow’s BOJ meeting, in a roughly JPY157.60-JPY158.10 range. Options for about $910 mln at JPY157.90 expire today.

• The UK budget saw little foreign exchange or Gilt response. Sterling's session low was recorded in late Asia-Pacific turnover, slightly below $1.3275. It recovered to almost $1.3340, new session highs during the Fed’s press conference. It is consolidating so far today, with a slightly heavier bias, inside yesterday’s range. A break of yesterday’s low could spur a move toward $1.3240 initially. There are options for GBP650 mln divided between two strikes ($1.3290 and $1.3300) that expire today.

• While the New Zealand dollar was punished yesterday for the disappointing decision by the central bank to stand pat, the Canadian dollar was not rewarded much for the Bank of Canada’s rate hike. Stil, it snapped a two-day decline. The US dollar posted an outside down day against the Canadian dollar. The US dollar reached almost CAD1.4070 yesterday before it ran out of steam, and after Warsh’s press conference, it was sold a new session low, slightly below CAD1.3990. Follow-through selling saw the greenback slip to CAD1.3970 before catching a bid and returning to the CAD1.40 area in Europe. Options for $1.1 bln at CAD1.3965 roll off today.

• The Australian dollar spent most of yesterday after $0.7025 and reached $0.7065 after Fed Chair Warsh’s press conference. It met the halfway mark of the decline since the early September high (~$0.7250). It reached almost $0.7070 today before sellers took in back to the $0.7030 area in European morning. A break of $0.7025, where options for A$725 mln expire today and another stack form A$1,1 bln expire today, would warn of the risk back to $0.6980-$0.7000, Yet we suspect it might be protected a little by the increased risk of a rater hike next week. In the futures market, the odds have risen to almost 85% from a little less than 65% at the end of last week. The New Zealand dollar is consolidating after yesterday’s shellacking. It has been confined to a narrow range around yesterday’s ~$0.5625 settlement, but it is struggling to sustain even modest upticks. Yesterday’s low was nearly $0.5585, and a retest cannot be ruled out.

• The Mexican peso recovered from the session low in the North American morning to new session highs during the post-FOMC press conference. The greenback had briefly taken out Tuesday’s high and rose to a little above MXN18.71. It was subsequently sold to slightly below MXN18.60 to new session lows. The US dollar is at a three-day high in Europe as it approached MXN18.75. Monday’s high was slightly above MXN18.76, but the year’s high, recorded last week was closer to MXN18.86. The US dollar finished slightly lower against the Brazilian real, which continued to claw back some of the steep post-election losses.

• The dollar ground to a new low against the offshore yuan today, near CNH6.6565. The move is slow but persistent. The dollar has not risen against the offshore yuan since October 14. The PBOC set the dollar’s fix a little lower today (CNY6.7147 vs. CNY6.7165 yesterday).

• After closing firmly yesterday against the Indian rupee (~INR95.23), the dollar reached a new 2.5-week high today near INR95.3765. Reports suggest the central bank intervened in the onshore market. The dollar entered a gap created earlier this month and it extends toward almost INR95.5950.

Other Markets

• US equities finished firmly yesterday, ahead of Microsoft and Alphabet earnings. The Nasdaq Composite and S&P 500 rose by 0.25%-0.30%. Their news was split with the former exceeding expectations and the latter disappointed. Today Samsung disappointed. Japanese indices were boosted by favorable earning reports, while China, Hong Kong, South Korea and Taiwan fell. New pressure in Indonesia saw its index tagged for 3.5%. Europe’s Stoxx 600 is advancing for the fourth consecutive session. The Nasdaq 100 futures are off nearly 1%, and the S&P futures are trading about 0.2% lower.

• Benchmark 10-year yields are narrowly mixed today. The US 10-year yield, which had settled a little below 5% on Tuesday, closed near 5.02% yesterday. It is straddling the 5% level today. The two-year Treasury yield slipped about 3.5 bp to slightly above 4.70% and is near 4.68% now. European 10-year rates are mostly slightly firmer.

• Gold rallied late yesterday and recorded the session high (~$4082.50). It recovered from the session low (~$4025.20) seen after the FOMC statement. While gold settled firmer, silver did not. Still, it recovered from the session low (~$50.30) set after the FOMC statement. It recorded a new session high as the equity market closed (~$54.65). Yet, both precious metals are weaker today. Gold has been sold through yesterday’s low and did not find a bid until around $4016. For its part, silver is off nearly 2.5% to record new lows for the year, slightly below $52.50.

• December WTI drew near the contract high set before last weekend, around $103.90. It reached $103.55 yesterday and settled around the middle of the day’s range (~$101.30). The contract is trading quietly today between around $100.55 and $102.30.

Data

• Yesterday’s Federal Reserve meeting seems to minimize the importance of today’s US data for market participants, even if not for economists. Investors remain highly confident of a hike in December, but whatever drives the decision it most likely will not be today’s PCE deflator or the first estimate of Q3 GDP. Moreover, with CPI and PPI in hand, the PCE deflator rarely surprises. The headline rate is expected to tick up to 3.6% from 3.4%, while the core firms to 3.1% from 3.0%. And despite, weak consumer confidence reading, personal consumption expenditures are expected to have outstripped income (again) in September. The figures will be incorporated into the Q3 GDP estimate. The median in Bloomberg’s survey is for a 3.2% annualized pace after 2.2% in Q2. The Atlanta Fed’s GDP tracker sees 3.4%.

• The Bank of Canada hiked yesterday as the swaps market anticipated. The market has the next hike fully discounted for the end of January. Canada reports the results of the establishment employment survey for August, when the household survey showed a loss of 41.7k jobs (of which 35.9k were full-time positions).

• Due to the time change in Europe, the ECB’s decision will be announced at 9:15 am ET today. It is widely anticipated it will stand pat. The market is also keenly interested in President Lagarde's career plan and succession at the central bank. The swaps market has a little more than an 80% chance of a hike in December.

• The UK reported September consumer credit and mortgage lending figures today. They tend not to capture the market’s imagination, though for the recorded, net consumer credit slowed as did mortgage lending. Chancellor of the Exchequer Healey’s budget presentation yesterday elicited a subdued market reaction. In fact, the Gilts appears to have the narrowest trading range yesterday than any budget presentation since 2020. A rate hike next week by the Bank of England has been heavily discounted (~95%) in the swaps market.

• Australia’s Q3 import and export price indices showed that the terms of trade improved after the mild deterioration in Q2. The export price index rose 1.4% after a 1.1% increase in Q2. The import price index fell 1.1% in Q3 after jumping 5.7% in Q2.

• Last week, Japanese investors sold foreign bonds. It was the sixth consecutive week and that matches the longest divestment streak since mid-2022. The Bank of Japan meets tomorrow. It is expected to hold after it hiked rates last month. There is a little more than an 80% chance of a hike in December discounted by the swaps market and two rate hikes are anticipated next year.

Disclaimer

Focus on FOMC and Bank of Canada, after Reserve Bank of New Zealand Disappointed

noreply@blogger.com (Marc Chandler) — Wed, 28 Oct 2026 06:47:22 -0400

The US dollar is mixed against the G10 currencies today. The outlier is the New Zealand dollar, which has been punished in response to the unexpected standpat decision by the central bank, the first of five G10 central banks that meet this week. It is a warning shot to the Bank of Canada. Governor Macklem had seemed to provide hawkish forward guidance in a recent speech and the market responded accordingly. However, economists are divided. The Canadian dollar is vulnerable to disappointment.

The Federal Reserve is widely expected to standpat. Although Chair Warsh eschews forward guidance, other parts of the Fed’s leadership apparently do not share his qualms and helped ease market speculation of back-to-back hikes. Still, the markets are anticipating a hike at the December meeting. The ECB meets tomorrow and is also seen on hold ahead of another hike in December. The BOJ meets Friday and does not appear prepared to hike rates at back-to-back meetings.

Prices

G10

• The euro could not get much above $1.1150 in North America yesterday, where options for around 1.35 bln euros expire today. It settled softly near session lows (~$1.1120) and slipped a little further to test the year’s low set mid-Oct, slightly below $1.1115. It still looks vulnerable. The short-term market looks like it does not want to go into the FOMC meeting short dollars.

• The dollar rose for the third consecutive session against the Japanese yen yesterday. It reached almost JPY158. It poked slightly above there today before pulling back to about JPY157.65 in early European turnover. This is a nearly month-old congestion area on the charts, options for almost $830 mln at JPY158.50 expire today, and 200-day moving average is near JPY158.55. The month’s high, recorded on October 14 was slightly shy of JPY159, though the dollar has not closed above JPY158.65 this month. A close below JPY157.35-40 would weaken the greenback’s tone.

• If the short-term market does not want to be short dollars ahead of the FOMC statement, it does not want to be long sterling ahead of the budget announcement. Sterling recovered the high for the month last week near $1.3420 and yesterday came within a 5/100-of-a-cent of $1.33. Today, it slipped through the bottom of the band of support that extended to $1.3280, which is around the 20-day moving average. It traded firmer in the European morning but has been unable to re-establish a foothold above $1.33.

• The US dollar snapped a seven-day drop against the Canadian dollar on Monday and consolidated firmly yesterday below CAD1.4055. The greenback posted an inside day yesterday but settled above the five-day moving average for the first time in two weeks. The US dollar rose to almost CAD1.4070 before stabilizing. The Bank of Canada’s decision is announced at 9:45 am ET. While the swaps market is discounting slightly more than an 80% chance of a hike, Bloomberg’s survey shows economists are nearly evenly divided. The Canadian dollar’s losses if the Bank of Canada stands pat, we suspect, would be larger than the gains on a hike. The US two-year premium over Canada has narrowed by 25 bp in a little more than the past two weeks. And the Fed’s likely hike next month will restore the policy rate spread.

• The Australian dollar traded firmly but still range-bound yesterday. The session high was set in North American but could not get above Monday’s $0.7040 high. That said, it held above $0.7000 for the third consecutive session. The firmer than expected CPI spurred increased speculation of a hike next week and this helped lift the Aussie to $0.7055. The momentum was not sustained and the it pulled back slightly below $0.7030 before consolidating. The Reserve Bank of New Zealand defied expectations for a hike, stood pat, and watch the New Zealand dollar slumped around 1.7% in disappointment. It settled near $0.5680 yesterday and dropped to $0.5585 before steadying.

• The Mexican peso fell for the first time in three sessions yesterday, while the Brazilian real continued to claw back more of its steep initial losses in reaction to Lula’s unexpected victory. The US dollar traded firmly within Monday’s (~MXN18.5250-MXB18.7610) range. It edged above yesterday’s high earlier today but is a bit heavier in the European morning. It traded to about MXN18.6440 in early European turnover. The dollar settled near BRL4.98 before the weekend and was quoted near BRL5.6050 on Monday. Yesterday, it traded a little below BRL5.31 before consolidating around BRL5.35.

• Even as the dollar rose against most of the G10 currencies yesterday, it fell against the offshore yuan. It recorded an ostensibly bearish outside down day that took it to a new multiyear low near CNH6.6635. The dollar is recording an inside today. The PBOC shaved the dollar’s fix today: CNY6.7165 (CNY6.7171 yesterday). Monday’s cyclical low was CNY6.7162.

• The dollar bottomed against the Indian rupee last week around INR94.3225. It pushed back above INR95.00 on Monday when it reached INR95.2635. It traded quietly yesterday, and after holding above INR95.00 today pushed to new session highs, above INR95.25, into the close. It was a favorable dollar close.

Other Markets

• The US Nasdaq closed firmly and above opening levels yesterday. The semiconductor index rose by more than the 3%, the most in more than a month, and the third consecutive gain. Microsoft and Alphabet report late today (after the FOMC and press conference). Most of the large equity markets in the Asia Pacific area advanced earlier today, with Australia and India notable exceptions. South Korea’s Kospi was lifted by 6.6% with the help of favorable earnings news from SK Hynix. Europe’s Stoxx 600 is a bit softer after rising Monday and Tuesday. S&P 500 and Nasdaq 100 futures enjoy a firmer bias.

• Benchmark 10-year yields were little changed at the close yesterday. The 10-year French yield edged a couple of basis points higher, but most of the other G10 bonds were +/- less than a basis point. Yields are firmer today and the peripheral premiums in Europe are widening a little. Most yields are 1-2 bp higher. The 10-year US Treasury yield is straddling the 5% level.

• Gold shined yesterday. It rose by slightly more than 1% yesterday, its biggest rise in about two-and-a-half weeks. Gold reached almost $4066 and edged to almost $4071 earlier today, the lower end of a band of resistance that may extend to around $4075. The upside momentum has stalled, and the yellow metal is traded below $4055 late in the European morning. The five- and 20-day moving averages are still falling. Silver recovered from the marginal new low for the year (~$52.65) yesterday and reached the session high (~$54.55) in North America. It took out Monday’s high by a few cents, but was unable to close above it, which would have had greater technical significance. Still, a close above $55 would be constructive. It is trading heavier now and is near $53.75.

• December WTI broke down yesterday. It settled below $100 for the first time in three sessions. There are two known unknowns: the new diplomatic initiative by Middle Eastern countries with Iran, and the implications of the Israeli election. However, speculation of a new hostilities after next week’s midterm US elections, has seen the contract recover today. It reached almost $102.25 as it trades firmly in yesterday’s range. Recall that last Friday, the contract reached almost $104.

Data

• The US reports September goods trade and inventory figures ahead of the session highlight, the outcome of the Federal Reserve meeting. A clear consensus has emerged for a standpat decision today but a strong conviction of a hike in December (90%+). Under Chair Warsh the statement tends to be terse as if it has been downgraded as a communication tool. Warsh may eschew formal forward guidance, but the market took its cues from comments by other Fed officials and recognized the bar to back-to-back hikes was higher than many initially appreciated.

• The Bank of Canada meets today. As recently as October 16, the market had leaned against a hike. However, slightly firmer than expected headline CPI and hawkish comments by Bank of Canada Governor Macklem encouraged the swaps market to discount the likelihood of a hike. The odds rose from about a 1-in-3 chance to almost 85% chance before the weekend. As seen by the New Zealand dollar, the Canadian dollar would likely sell off if the Bank of Canada does not deliver. We suspect the US dollar could rise toward CAD1.4135-50 on such disappointment.

• UK Chancellor of the Exchequer Healey presents the government’s budget. It is expected to contain small tax and spending measures. It will be modest compared with the broad vision that PM Burnham has sketched. It will likely result in around one-third smaller projected fiscal cushion (GBP15 bln) than the government inherited (~GBP23.5 bln). While the budget is expected to have many modest measures, the financial markets may be sensitive to whether he does forward, over the apparent objection of some officials, with returning the bank profit surcharge to 8% from the 3% that the previous Tory Chancellor (Hunt) had cut. Freezing the fuel tax, which was set to increase in January and March will be a more popular decision as will extending the “warm house” GBP150 bp tax rebate. The minimum wage is expected to be raised. Earlier this week, Burnham pushed back against growing expectations that he would call for an early election to secure a proper mandate. He seeks to reposition the UK in light of the developments in the US and European security needs and the UK’s underperformance since Brexit. This seems part of the discussions being held that will culminate on November 20 in the UK-EU summit.

• Australia reported firmer September and Q3 inflation and this keeps the central bank meeting on November 3 live. September CPI rose by 0.8% for a 4.3% year-over-year, slightly more than expected. It is the highest reading since March. The quarterly print more than doubled to 1.3% from 0.6% in Q2. The trimmed mean readings in September and Q3 were slightly firmer than the August and Q2. In the futures market, the odds of a hike next week were lifted to 80% from about 60% yesterday.

• By a 4-3 vote, the Reserve Bank of New Zealand surprised the market and kept policy steady at 2.75%. The central bank’s statement acknowledged that tighter monetary policy is likely to be needed, but it remains conditional on the economic outlook. The RBNZ had hiked rates in back-to-back meetings (July and September). The swaps market is discounted around an 85% chance of a hike at the next meeting in December. Note that New Zealand holds a general election on November 7. Polls show a close contest.

Disclaimer

Euro Underperforms

noreply@blogger.com (Marc Chandler) — Tue, 27 Oct 2026 06:48:41 -0400

The markets are nervous, five G10 central banks meet in the next three sessions. December WTI holds above $100 a barrel as Iranian attacks continue. Israel goes to the polls today, while top security officials from Saudi Arabia, Pakistan, and Türkiye meet Iranian leaders in Tehran to see if another round of US-Israeli attacks can be averted. The market will also keep on eye on Brazil to see if yesterday's sharp sell-off in response to the unexpected election results will be embraced as a new buying opportunity.

The dollar is firmer against most of the G10 currencies. Renewed pressure on peripheral bonds in Europe, including France, helped drag the euro lower. It is the weakest of the G10 currencies. After posting a bearish outside down day yesterday, today could be the first session this year that the euro will not trade above $1.12. The US economic calendar features durable goods orders, house prices, new home sales, and the Conference Board’s consumer confidence measure. The FOMC and the Bank of Canada meet tomorrow. The market is comfortable with the Fed on hold until December after last month’s hike. Hawkish comments from the governor of the Canada more than a week ago, spurred expectations that the Bank of Canada will initiate its tightening cycle tomorrow.

Prices

G10

• After stalling near $1.1225 in the Asia Pacific session yesterday, the euro bled lower in Europe and North America. It reached a seven-day low near $1.1175. Follow-through selling today as tensions re-emerge in the European bond market sent the euro to $1.1135 in Europe. There is little in the way of a retest on the year’s low recorded in the middle of the month near the $1.1110 retracement objective. A break of it could spur a move toward $1.10 initially, but the next retracement is near $1.0880.

• Before the weekend, the dollar held above the (50%) retracement target of the gains from the low early last month against the Japanese yen (~JPY156) and recovered to almost JPY157.65 yesterday. It has crept up to almost JPY157.90. The greenback has spent most of the month straddling the JPY158 area. Options for ~$1.65 bln at JPY157.85 and ~$1.25 bln at JPY158 expire today.

• Sterling slumped to slightly below $1.3330 yesterday and continued selling today pushed it to around $1.3310. Options for around GBP455 mln at $1.3300 expire today. We anticipate initial support in the $1.3280-$1.3300 area, and then around $1.3250. Nervousness ahead of tomorrow’s budget may keep buyers sidelined today.

• The Canadian dollar fell yesterday for the first time in eight sessions. The US dollar approached a retracement target near CAD1.3965 before the weekend and settled slightly above CAD1.40. Initial gains brought the greenback to about CAD1.4055 before pulling back to almost CAD1.40 early in the NY afternoon yesterday. It is consolidating quietly in a roughly CAD1.4010-CAD1.4030 range today. The Bank of Canada meets tomorrow, and the swaps market has almost an 85% chance of a hike priced.

• The Australian dollar stalled yesterday after making a new high for the month around $0.7040. It set the session low in early North American turnover slightly in front of $0.7010. It continues to consolidate within the recent range, holding between $0.7010 and about $0.7035 so far today. Options for A$1.3 bln at $0.7030 and A$720 mln at $0.7015 expire today.

• The dollar set the high yesterday against the Mexican peso as the market reacted to the initial surprising news from the Brazilian run-off election. The dollar poked briefly above MXN18.76 and traded choppily until the North American session. It was sold to almost MXN18.5250 late in the NY morning. The greenback has come back a better bid today and has returned to almost MXN18.61. Initial resistance may be around MXN18.65 today. Yesterday, in response to the election, the dollar soared to almost BRL5.6050 (after it settled last week slightly below BRL4.98. It backed off and briefly traded near BRL5.39 in late dealings. There is a sense that the market exaggerated, but some investors want to see the new cabinet appointments first.

• The yuan continues to grind higher against the dollar. The greenback eased to CNH6.6670 against the offshore yuan and slightly below CNY6.6680 against the onshore yuan. The dollar made a marginal new low against the offshore yuan, near CNH6.6665 today. And the PBOC set the dollar’s fix at CNY7.7171 (CNY6.7162 yesterday). Bloomberg’s survey found a median forecast of CNY6.51 for the end of next year. Subjectively, we are anticipating something closer to CNY6.40.

• The dollar consolidated against the Indian rupee today in the upper end of yesterday’s range. It traded between about INR95.0875 and INR95.2450 today. The rupee settled slightly firmer today to snap a three-day decline.

Other Markets

• US equities indices closed firmly yesterday and above opening levels. The Philadelphia Stock Exchange Semiconductor Index gained almost 3% yesterday, its largest rally in a little more than a month. Most of Asia Pacific’s largest bourses rose today, led by South Korea’s 3.1% rally. China, Hong Kong, India, and Singapore were notable exceptions. Europe’s Stoxx 600 is treading water, while US equity futures are slightly firmer.

• Benchmark 10-year yields were mostly lower yesterday. France’s 12 bp decline led the way, and Italy’s 10-year yield pulled back almost nine basis points. The 10-year Treasury yield mostly held below 5% and settled near 4.99%. It is still there now. European bonds are mixed today but the peripheral premiums, including France, are wider.

• Gold recorded an inside day yesterday as it remained within the pre-weekend range (~$3978.30-$4026.50). It finished firmly but is trading within yesterday’s range today. It must re-establish a foothold above $4100 to be meaningful. Silver also recorded an inside day (last Friday’s range was ~$53-$54.75). It slipped to a new low (~$52.65), today before steadying. A close above $55 would help stabilize the technical outlook.

• December WTI held above $100 a barrel yesterday and settled firmly even if a little below last week’s close (~$103.25). The pre-weekend high was slightly below $104. It is trading inside yesterday’s range (~$100.35-$103.15). The price action looks constructive.

Data

• The US economic diary is busy today, with September durable goods orders that likely bounced back with the help of a surge in Boeing orders (165 gross orders vs. 15 in August). However, excluding defense and aircraft, durable goods order may have slowed after rising 1.6% in August. House prices are seen edging up in August. The Conference Board’s October measure of consumer confidence will be reported. It is seen softening. September new homes sales are expected to unwind the lion’s share of August’s 6.4% increase. The data will overshadow the Richmond and Dallas Feds’ October surveys.

• Mexico reports the September trade figures. In the first eight months of the year, Mexico recorded a $9.8 bln surplus. In Jan-Aug 2025, Mexico recorded a trade deficit of almost $915 mln.

• The eurozone reported money supply growth and September lending figures. M3 growth was steady at 3.5% year-over-year. The ECB reported that banks have tightened credit conditions and that demand for loans slackened in Q3. Higher rates and weaker demand from small and medium-sized businesses were the main culprits.

• Australia reports September and Q3 CPI tomorrow. The monthly CPI is expected to rise to 4.2% from 4.0%. The quarterly readings are expected to rise by 1.2%, or twice the increase seen in Q2. The underlying trimmed mean looks steady around 3.6%.

• Japan reported September services PPI rose to 3.7% after the August series was revised to 3.5% from 3.7%. This matches the cyclical high recorded in June 2024.

• China reported 14.4% rise in industrial profits year-over-year after a 4.2% increase in August. Year-to-date year-over-year industrial profits rose 15.5% after rising 15.7% in August.

Disclaimer

Moody's Did Not Downgrade France and Peripheral Premiums are Narrower, but the Euro Struggles to Find Traction

noreply@blogger.com (Marc Chandler) — Mon, 26 Oct 2026 06:43:16 -0400

There are two impulses today. First, defying expectations, Moody’s did not downgrade its assessment of French credit, which remains above S&P and Fitch’s ratings. With a show of force by the government, French protests were less violent. French bonds have rallied and the peripheral premium has narrowed. Yet, the euro has found little meaningful traction. Second, and also defying expectations, Brazilian President Lula appears to have beaten Bolsonaro in a nailbiter. In the futures market the Brazilian real has been sold. Bonds and equities are expected to follow suit.

The US dollar is mostly firmer to start the new week, which features the FOMC meeting, the first estimate of Q3 GDP, and a series of big tech earnings. Beijing, seemingly undeterred, set the dollar’s reference rate at a new high since mid-2022. Four other G10 central banks meet this week and the market is most confident that the Reserve Bank of New Zealand and the Bank of Canada are most likely to hike, while the Fed, ECB, and BOJ are widely expected to standpat, but hike again in December.

Prices

G10

• After testing the upper end of its recent range on Thursday, the euro flirted with the lower end of its range on Friday, ahead of the weekend. That range is roughly $1.1185-$1.1270. The euro comes into today with a three-day loss in tow. Despite the fact that Moody’s did not downgrade France ahead of the weekend, the protests for less violent, and the peripheral premiums over Germany are narrower, the euro has found little traction. It is in a little more than a quarter-cent range above $1.12, where options for about a billion euros expire today. Another set of options for a little more than 1 bln euros at $1.1250 also expire today. Last week's low was near $1.1185 and a break of $1.1175 could signal a retest on the year's low and retracement objective, a little above $1.11.

• With the pre-weekend move, the greenback nearly met the (50%) retracement of the rally from the early September low against the yen, a little below JPY153. The retracement was found near JPY156. Firmer US rates seemed to help fuel the dollar’s recovery back above JPY157. The dollar held above JPY156.65 today and is making new session highs in late European morning turnover near JPY157.35. Initial resistance is seen around JPY157.50-65.

• Sterling posted an inside day ahead of the weekend. It traded between about $1.3365 and almost $1.3410. It looks tired after rallying from around $1.3135 on October 14 to last week’s high near $1.3420. It has been sold to around $1.3345 in Europe today. The initial losses could extend toward $1.3280-$1.3300. Options for about GBP355 today and another set for GBP455 mln tomorrow at $1.33 expire.

• The pendulum of expectations swung toward a Bank of Canada rate hike this week helped fuel the Canadian dollar recovery last week. Indeed, it has traded higher for the past seven sessions, the longest rally since March 2022. The greenback nearly met the (61.8%) retracement of its rally from September 8 low near CAD1.3760. The retracement was about CAD1.3965. Despite comments from the Trump administration that a trade deal with Canada may be close, the Canadian dollar has pulled back today. The US dollar reached CAD1.4050 before pulling back to test CAD1.40. The US two-year premium over Canada narrowed to about 133 bp at the end of last week, the least since mid-September. It peaked near 160 bp on October 9.

• The Australian dollar traded firmly before the weekend. It was the first session since September 28 that the Aussie did not trade below $0.7000. It finished firmly. It held above $0.7020 today and has edged up to new session highs near $0.7040 in the European morning. A move above $0.7050-$0.7065 would strengthen the technical tone.

• After reaching a new high since last September against the Mexican peso on October 22 (almost MXN18.86), the greenback consolidated ahead of the weekend. The Brazilian election news initially weighed on the peso, and the dollar rose to MXN18.76 after it settled before the weekend slightly below MXN18.66. It stabilized and held above the MXN18.6370-MXN18.6430 lows set in the previous two sessions. The dollar settled ahead of the weekend near BRL4.9790. It was trading near BRL5.20 before the outcome of the first round of the presidential election.

• Before the weekend, the offshore yuan rose to its best level since June 2022. The dollar finished the week straddling CNH6.67. It brought this year’s gain to about 4.6% and made it one of the strongest currencies this year. It is up around 9% this year against the euro. The dollar ground down to CNH6.6670 so far today. The PBOC set the dollar’s reference rate at CNY6.7162 today (CNY6.7180 before the weekend).

• The dollar was little changed against the Indian rupee last week. The greenback‘s gain in the last two sessions offset the weakness seen in the first half of last week. The rupee traded heavier today, and the dollar rebounded a little more than 0.35% to settle near INR95.19, its highest close in eight sessions.

Other Markets

• The S&P 500 and Nasdaq Composite settled above opening levels before the weekend, and the Philadelphia Stock Exchange Semiconductor Index gained nearly 1%. Asia Pacific equities were mixed today. Japanese and Chinese market themselves were mixed, and tech-sensitive Taiwan and South Korean equities fell over 1%. Europe’s Stoxx 600 is trying to snap a two-day downdraft and is up about 0.4%. US index futures are up 0.3-0.5%.

• North American yields rose before the weekend. Still, the US 10-year yield Benchmark 10-year yield posted the first weekly close below 5% since mid-September. Core European rates today are mostly firmer, but the peripheral yields, including France, are lower and the premiums have narrowed. The French 10-year premium over Germany is about 10 bp narrower around 156 bp. The 10-year US Treasury yield is flat, slightly below 5%.

• Gold initially dropped to almost $3975 ahead of the weekend, its lowest level since mid-July. It had been turned back from the approach of the 20-day moving average (~$4150) the previous session. It steadied but could not re-enter the previous day’s range when the low was around $4021. It settled below the lower Bollinger band for the second consecutive session. It is nearly $4021 today. It is toying with the lower Bollinger Band in the Europe. Silver recorded a new low for the year ahead of the weekend, near $53. Despite a slight recovery, it was unable to re-enter the previous day's range, missing the low of nearly $54.50. It is trading quietly today between about $53.60 and $54.40.

• December WTI jumped around $3 at the end of last week and set a new contract high near $103.30. It was the fourth consecutive weekly advance, and, in that run, it rose by nearly 16.5%. It is consolidating today between about $100.60 and $102.60.

Data

• A week that features the FOMC meeting and the first estimate of US Q3 GDP begins slowly with September Chicago Fed’s National Activity Index and the October Dallas manufacturing survey. Today’s reports typically do not move the markets. The median forecast in Bloomberg’s survey has edged up to 3.0% for Q3 GDP. The Atlanta Fed GDP tracker is 3.5%. There is little doubt in the market’s mind that the Fed stands pat this week, but hikes at the December meeting. Corporate earnings from Microsoft and Alphabet are due after the FOMC meeting concludes on Wednesday and Amazon, Intel, and SanDisk will be announced Thursday.

• Germany’s IFO October investor survey was little changed. The current assessment slipped for the first time in three months to 88.8 vs. 89.5 in September). It was at 85.6 at the end of last year. The expectations component edged up for the sixth consecutive month. It is at 91.6 (vs. 90.4). It was at 89.7 at the end of 2025. The reading for the overall business climate is 90.2 (vs. 89.9). It was 87.6 at the end of last year.

Disclaimer

Week Ahead: Five G10 Central Banks Meet and Reserve Bank of New Zealand and the Bank of Canada are Most Likely to Hike

noreply@blogger.com (Marc Chandler) — Sat, 24 Oct 2026 06:48:23 -0400

The US dollar was mostly softer after the G10 currencies last week. The euro, where the bond tensions escalated, was the notable exception. It finished the week with a modest loss of about 0.35%\. It was the sixth weekly decline in the past seven weeks, Moody's did not downgrade France's credit worthiness, but the prospect of more social unrest this weekend, warns of downside risks for the euro at the start of next week. The French 10-year premium widened by 30 bp over Germany last week to finish at about 167 bp, which nearly double what it was at the end of August, and the most since 1990. The euro was sold to new lows for the year against sterling and the yen ahead of the weekend. A summary of last month's Swiss National Bank meeting downgraded the concern about the exchange rate strength, but since the end of last month, the franc has appreciated by more than 3% against the euro and reached its best level since early July.

Half of the G10 central banks meet next week. It had looked like the Reserve Bank of New Zealand was the most likely to raise rates, but market sentiment has also swung in favor of a Bank of Canada rate increase, too. While the Federal Reserve, the European Central Bank, and the Bank of Japan will most likely stand pat, the most likely scenario is that all three hike rates in December. The US and eurozone report their first estimates of Q3 GDP. The US economy may have accelerated to 3.0% or above on annualized basis, while the eurozone economy looks to have slowed to 0.2% quarter-over-quarter from 0.6% in Q2.

Drivers: The dollar has become more sensitive to changes in the 10-year yield than that two-year, but the correlations are both much less than earlier in the year. The 30-day correlation of changes in the Dollar Index and the two-year Treasury yield is around 0.35, well below the 0.80 correlation seen in May and June. The correlation between changes in DXY and the US 10-year yield is around 0.45. Its peak was near 0.75. Beyond interest rates, the dollar's resilience appears to be partly a function of the conclusion that it is best positioned to absorb the shocks, some of which are its own making.

Data: The most important event in period ahead is the FOMC meeting that concludes on October 28. We did not attribute strong chances of back-to-back rate hikes by the Federal Reserve, and since early this month, the speculation has eased. The Fed funds futures are discounting around a 10% chance of a 25 bp hike, down from a 70% chance in late September. Still, the market has a December hike largely discounted and another one likely by end of Q1 27. September personal income, consumption, and deflators are due the following day (October 29). Spending seems to have slowed from 0.9%, but the median forecast in Bloomberg's survey for a 0.6% increase is still robust. From the CPI and PPI, economists have a good handle on the PCE deflator. The headline pace may tick up to 3.6% from 3.4%, while the core rate is seen firming to 3.1% from 3.0%. However, the highlight of October 29 is the first look at Q3 GDP. The median forecast in Bloomberg's survey is 3.0%, while the Atlanta Fed's GDP tracker is at 3.5%. An increase in capex and government spending is expected to more than offset a modest pullback in consumption and weaker net exports.

Prices: The Dollar Index made marginal new low for the month on October 22, slightly below 101.50, and consolidated ahead of the weekend. A move above last week's high, a little below 102.10, could signal a re-test on the year's high recorded on October 14 near 103.00. Recall that the 102.85 area is the halfway mark of DXY's decline from last year's high (~110.15) and the next retracement is nearly 104.60. Still, note that the momentum indicators have turned down from over-bought readings and the five-day moving average did cross below the 20-day moving average for the first time since mid-September in the middle of last week.

EMU

Drivers: The rolling 30-day correlation of changes in the euro and changes in the US-German two-year and 10-year interest rate differentials is near -0.45. That is around the greatest inversion of the year. The 30-day correlation between changes in the euro and the German-French 10-year differential is around 0.50. After peaking near 0.70 in early June and reached 0.60 recently. The correlation was briefly inverted last month.

Data: The European Central Bank meets on October 29. Like the Federal Reserve, it does not seem prepared to hike key rates at back-to-back meetings. However, the market anticipates that another hike, the third of the year, will be delivered in December (~75%). The swaps market anticipates another hike in Q1 27 (~60%). On October 30, the first estimate of the aggregate Q3 GDP is due. The median forecast in Bloomberg's survey anticipates that the economy moderated after growing 0.6% quarter-over-quarter in Q2 to around 0.2%. On October 30, the four largest members of the eurozone will also report October CPI, although the aggregate estimate will not be reported until November 4.

Prices: The euro toyed with the 20-day moving average last week, which it has not settled above since September 9, but ultimately broke lower. The price action reinforces the cap in the $1.1260-70 area. Although there may be support near $1.1115, the year's low near the (50%) retracement objective of the rally from last year's low (~$1.0140) found near $1.1110 looks vulnerable. There may be some psychological significance of $1.10, the next retracement (61.8%) is around $1.0880. Here, too, we note that the momentum indicators have turned higher but are still oversold.

PRC

Drivers: Beijing continues to signal acceptance of a gradually appreciating yuan. Currently, the signal is sent most clearly by the daily fix. It is possible, as some argue, that the state banks are accumulating foreign assets as a "stealth intervention", though we suspect commercial and pecuniary motivations are the key, but it should be seen as a moderating force. Surely, the PBOC is not consistently setting the dollar's fix lower and trying to engineer weaker yuan.

Data: September industrial profits will be reported on October 27. The year-to-date year-over-year measure improved in first part of the year but has weakened in the last three months. It is the longest decline since 2024. China's CSI 300 equity index is off nearly 10% this year and in mid-October, reports suggested that Beijing was encouraging insurance companies and state funds to support the equities. China's October PMI will be reported on October 31. New modest stimulative measures have been announced in recent weeks.

Prices: The dollar quietly is grinding slowly lower against the yuan. It reached almost CNH6.6685 against the offshore yuan before the weekend, a new multiyear low. While attentive to signals from the PBOC, we suspect the dollar may finish the year near CNH6.62 compared with the CNH6.67 median forecast in Bloomberg's latest survey. The onshore yuan rose it its best level since June 2022 last week (~CNY6.67). The median forecast in Bloomberg's survey for the end of the year is CNY6.68. Our more favorable outlook for the yuan would see it around CNY6.65.

Japan

Drivers: Over the past 30 sessions, changes in the dollar-yen exchange rate is most correlated with changes in the two-year interest rate differential than the other financial variables we track, outside of the Dollar Index itself It is around 0.65, the highest since early June, compared with about 0.62 for DXY. The yen's weight in the Dollar Index is 13.6%. The 30-day correlation between the exchange rate and the US 10-year yield is around 0.58 and the correlation with the US two-year near 0.61.

Data: There are two highlights in the coming days. First, on October 30, Tokyo's October CPI is due. It offers solid insight into national price developments. Tokyo's September CPI jumped to 2.7% from 1.9%, largely a reflection of the effects of childcare and water fee waivers, though underlying price pressures were evident. Yet, the impact on the second highlight, the BOJ meeting is likely to be modest. Like the Federal Reserve and European Central Bank, the Bank of Japan is unlikely to hike rates at back-to-back meeting. The swaps market has about a 75% chance of a December hike discounted and leans toward another hike in H1 27. The BOJ will also update its economic forecasts. Recall that in July, it projected growth to be 0.6% this year, 0.8% in 2027 and 2028. Core inflation was seen at 2.5% this year, 2.4% next, and 2.0% in 2028.

Prices: The dollar forged a cap around JPY158.50 in recent weeks. It broke down last week. It was as if it was pulled down by the sharp drop in US interest rates spurred by the intensification of the retreat from the AI-meme and perhaps as a safe haven from the high yielding eurozone sovereigns. The greenback met the (50%) retracement objective of the rally from the September 9 low (~JPY152.90), found near JPY156 ahead of the weekend. The next retracement (61.8%) is about JPY155.25. The momentum indicators have turned down, and the five-day moving average crossed below the 20-day moving average last week. The JPY157 area may now offer initial resistance.

Drivers: Although changes in the euro and sterling are highly correlated (~0.85 past 100 sessions), sterling is at its best level against the euro since last May. It has appreciated almost 4% against the euro this year and is nursing a negligible loss of around 0.75% against the greenback. Those challenging the dollar's resilience have been better off buying sterling than other G7 currencies.

Data: The UK reports September consumer credit and mortgage lending figures on October 29, but the highlight is Chancellor of the Exchequer Healey's presentation of the budget on October 28. The rise in market rates and increased spending has eaten away at the fiscal cushion. Several measures have already either been announced (temporary reduction in the VAT on gasoline), or hinted at, like the surcharge on the profitability of banks. In 2023, the Tory government cut the bank surcharge on the corporate tax to 3% from 8%. Fully reversing it could raise ~GBP3 bln (~$4 bln) but banks warned that increasing their tax could reduce lending, and Bank of England Governor Bailey warned that higher taxes will translate into high mortgage rates. There is some speculation that Healey also may endorse a "wealth" visa program, resurrecting the broad concept, ended by Boris Johnson, of the "investor visa".

Prices: Sterling reached almost $1.3420 on October 22, its best level since September 16. It likely marks a near-term high. It met the (50%) retracement of sterling's losses since the August 21 high (~$1.3675) and stopped shy of the 200-day moving average (~$1.3435). The pullback, we envisage, could take sterling back into the $1.3280-$1.3300 area.

Canada

Drivers: The 30-day correlation between changes in the Dollar Index and the US dollar-Canadian dollar exchange rate is a little above 0.70. The correlation between the exchange rate and the two-year interest rate differential is around 0.62, where it has steadied after trending higher since mid-June. The correlation between the exchange rate and the US two-year yield is a little above 0.38 and slightly inverted (~-0.10) with changes in Canada's two-year yield.

Data: The Bank of Canada meets on October 28. The swap market boosted the odds of a rate hike from about 35% on October 16 to 80% ahead of the weekend. The odds jumped after the firm September CPI reading on October 19 (3.2% vs. 3.0% in August). On October 30, the August monthly GDP is due after a flat July reading. The downside risks to growth that the central bank has highlighted appear to be materializing. The economy grew by 3.3% at an annualized pace in Q2, and the median forecast in Bloomberg's survey is for 1.6% growth in Q3.

Prices: With the help of falling interest rates and a smaller US premium, the US dollar continued to surrender the gains registered from early September (~CAD1.3760) to the mid-October high (~CAD1.4300). With last week's losses, it nearly met the (61.8%) retracement target, near CAD1.3965. The CAD1.4050 area may offer initial resistance. The momentum indicators are falling hard but are not oversold. The five-day moving average is the below the 20-day. The note of caution comes from the Bollinger Band, which the greenback has settled below for the past four sessions. The Canadian dollar begins next week with a seven-day rally in tow, its longest advance since March 2022.

Australia

Drivers: Australia and Norway have the highest policy rates in the G10, and their currencies are the best performers this year. Hawkish comments by the central bank have boosted the market's waning confidence that even after four hikes this year, weakening of the real estate market, and a disappointing September jobs report, and a disappointing flash October PMI, the tightening cycle may not be over. The futures market has about a 63% chance of a hike at the November 3 meeting, a little more than 70% chance of a hike discounted before the end of the year, up from less than 45% a week ago, and a little more than a 90% chance of hike by the first meeting in 2027 (Feb 9).

Data: The September and Q3 CPI will be reported early on October 28. August CPI rose 4.0% year-over-year. Last September, the CPI 0.5% month-over-month, and 1.3% in Q3 25, quarter-over-quarter. Private sector credit growth has been robust. It rose at an 8.4% year-over-year pace in August. It peaked near 8.6% in June, the strongest pace since October 2022. Slower credit growth would support ideas that the four hikes this year are indeed having impact.

Prices: The Australian dollar reached a three-and-a-half month low in the middle of October ($0.6895) and recovered to about $0.7035 last week. It met the (38.2%) retracement of its leg down from the September 9 high (~$0.7240). The 200-day moving average is near $0.7050 and the next retracement (50%) is about $0.7065. The momentum indicators are trending higher. A close below $0.7000 would disappoint the momentum traders.

Mexico

Drivers: The peso has been hit by three forces that caught the market ill-prepared. The peso's losses, the most among emerging market currencies this month (~3.4%) contrast to the Colombian peso, which leads the EM complex this month (~3.9%) followed by Russian ruble (3.2%) and the Brazilian real (~2.8%). The unwinding of US dollar-funded structures seemed to have initially triggered the move, followed by a surprisingly dovish minutes of the recent Banxico meeting, and now the stymied trade talks with the US.

Data: September trade figures are due on October 27. Mexico's external account has strengthened this year, even though the domestic economy is lackluster. In the first eight months of the year, Mexico recorded a trade surplus of $9.86 bln. In the first eight months of last year, Mexico reported a trade deficit of about $913 mln and a deficit of $17.9 bln in the same period in 2024. Exports are up 29.3% year-over-year through August, while imports 26.7% On October 30, Mexico reports Q3 GDP. The economy grew by 1.4% quarter-over-quarter in Q2. The median forecast in Bloomberg's survey projects a 0.1% quarterly expansion in Q3. An unexpected contraction would reinforce the dovish cast of the recent Banxico minutes.

Prices: The dollar spiked to MXN18.85 on October 22. It has not been this high since September 2025. It seems excessive, but that may speak to market positioning. The dollar recorded two-year lows in early September. It spent the pre-weekend session consolidating within the previous session's range. The next technical area of note is MXN18.95-MXN19.10. Initial support may be near MXN18.60, and then MXN18.50.

Disclaimer

France's Flash October PMI drop below 50 Ahead of Moody's Decision Later Today

noreply@blogger.com (Marc Chandler) — Fri, 23 Oct 2026 06:41:36 -0400

The foreign exchange market looks eerily calm. After the safe haven flows yesterday supported the Swiss franc and yen, today they have diverged. The yen’s minor gain puts its atop the G10, while the Swiss franc’s 0.25% loss puts its at the bottom. The pressure in the European bond market has eased today, but Moody’s review of France’s debt rating late today poses a challenge, and although the Macron government has threatened military assistance to quell the social unrest, more activity is likely this weekend.

The Philadelphia Stock Exchange Semiconductor Index tumbled 6.7% yesterday. It was the largest drop since June and tested the 200-day moving average for the first time since June 2025. December WTI is within pennies of the contract high set on Tuesday (~$101.35). Brazil’s presidential run-off between Lula and Bolsonaro will take place Sunday. It looks like dead heat. The markets responded favorably to Bolsonaro’s lead in the first round.

Prices

G10

• The euro seemed pulled between pressure on France and the sharp drop in US interest rates as the AI-meme showed more cracks. The former pushed the euro slightly below $1.1190 before the latter helped it recover to around $1.1230 after European markets closed yesterday. It is trading quietly but with a heavier bias between $1.1185 and about $1.1225. Options for almost 650 mln euro at $1.12 expire today. The flash October PMI was softer and pressure in European bonds has subsided today.

• The yen was the strongest G10 currency yesterday, gaining about 0.85% against the US dollar, its best session of the month. It also reached a new high for the year against the euro. The dollar tumbled to JPY156.70 yesterday. After the low was recorded in early North American turnover, the greenback consolidated and reached about JPY157.35 before the buying dried up. Yesterday’s low corresponds with the (38.2%) retracement of the dollar’s rally from the Sept 8 low (~JPY152.90). Follow-through selling today saw the dollar approach the next retracement (50%) near JPY156. The greenback recovered to new session highs around JPY157.15 before falling back to almost JPY156.50 in the European morning. Options for almost $1.2 bln at JPY157 expire today.

• Sterling reached nearly $1.3420 yesterday, its best level since September 16. It faltered and was sold to sold to a two-day low (~$1.3355) in late European turnover before sterling recovered and reached almost 1.3410 in the NY afternoon. It is trading quietly today between about $1.3370 and nearly $1.3410. Options for GBP840 mln at $1.3400 expire today.

• The Canadian dollar reached its best level yesterday since September 21. It has recouped a little more than half of its seemingly relentless losses beginning in early September. The US dollar was sold through (50%) retracement near CAD1.4030 and approached CAD1.40, where options for about $570 mln expire today. The US dollar is straddling the CAD1.40 level late in the European morning and is threatening to extend its pullback for the seventh consecutive session. The next retracement (61.8%) is by CAD1.3965.

• Although the Australian dollar traded a few ticks on both sides of Wednesday’s range yesterday, the tone was more consolidative. It probably needs to push above the $0.7050-65 area to be noteworthy. Options for about A$605 mln at $0.7000 expire today. It has been confined to a $0.7005-$0.7025 range so far today.

• The Mexican peso’s slump was continued yesterday. The dollar surged to almost MXN18.86 yesterday in early North American turnover before it largely settled in a MXN17.65-MXN17.75 trading range. It has been another tough week for the peso. It is the seventh consecutive weekly loss, and it does not look complete. The dollar is trading firmly in the upper end of yesterday’s range. The run-off in the Brazilian presidential election takes place this weekend and the polls show a tight race, but Bolsonaro is still favored. The dollar settled last week near BRL5.06 and reached almost BRL5.0 at the start of the week and traded back near BRL5.0555 yesterday.

• The dollar continues to grind lower against the yuan. The greenback slipped slightly below CNH6.6690 today, a new low since July 2022. The onshore yuan is slightly weaker but the two are traveling together. The PBOC set the dollar’s fix at CNY6.7180 today (CNY6.7220 last Friday). It has been set higher on a weekly basis once since the end of July.

• The Indian rupee snapped an eight-session advance yesterday and pulled back a little more today. In the eight-day run, the dollar fell from about INR96.77 to INR94.3225, its lowest level since September 3. It recovered to INR94.9425 yesterday and reached almost INR94.98 today and settled near the highs.

Other Markets

• Equities continue to struggle. Large Asia Pacific bourses mixed lower today and the MSCI index for the region fell for the fourth consecutive week. Europe’s Stoxx 600, with less tech exposure, has fallen by about 1.6% this week, taking today’s 0.5% loss into account. The S&P 500 and the Nasdaq Composite are near the lower end of their recent ranges. The S&P 500 and Nasdaq 100 futures are little changed.

• Benchmark 10-year yields in Europe took heart from the dramatic decline in US rates amid the tech-led equity market sell-off. France was the notable exception. Its 10-year yield rose nearly six basis points and the premium over 10-year German bunds widened to 173 bp. The 10-year Treasury yield fell ~16 bp to about 4.96%, its lowest yield in a month. The US two-year yield fell ~1 6bp to 4.64%, its lowest since September 16. Asia Pacific yields fell 5-9 bp today. European yields are narrowly mixed, but tensions are slightly more relaxed. The 10-year US Treasury yield is nearly three basis points higher (to 4.98%).

• Gold was taken for around $120 yesterday. It fell to almost $4021 for the first time since early August. It traded below $4000 today but recovered and is near $4024 in late European morning turnover. The low for the year was recorded at the end of June near $3943. Silver did not wait for gold. It extended yesterday’s losses and fell to about $53.45, a new low for the year today. It peaked in January a little below $122.

• December WTI consolidated firmly yesterday, above Wednesday’s settlement ($97.15). Although it traded inside Wednesday’s range, which itself was inside Tuesday’s range, the $99.30 close was a new settlement high for the contract. It is trading a little above $101 now, and pennies from the contract high made earlier this week.

Data

• The US preliminary October PMI is expected to soften, and the composite is seen pulling back to 57.1 from 58.4. If so, it would snap a four-month advance. Still, it would be a strong reading. The first estimate of Q3 GDP is due next week (median forecast in Bloomberg’s survey is 2.8%). Activity in Q4 is expected to moderate but hold above 2%. The final October University of Michigan consumer confidence and inflation expectations tend to have less impact than the preliminary report.

• Canada reports August retail sales. After slumping by 0.7% in July, they are expected to have jumped 1.3%, according to the median forecast in Bloomberg’s survey. We already know that light vehicle sales increased in August. Through July, retail sales have risen by an average of 0.6% a month this year compared with an average decline of 0.1% in the first seven months of 2025. More broadly, consumption rose 3.3% at an annual rate in Q2 and may have slowed in Q3.

• Mexico reports August IGAE economic activity, which is similar to a monthly GDP estimate. It is seen rising by 0.3%, but given the base effect, the year-over-year rate may slow to around 3% from about 3.5% in July.

• The eurozone’s flash October PMI slowed. The composite eased to 51.9 from 53.1. It is the first decline since May. It finished last year at 51.5. The manufacturing PMI is at 52.4 (52.9 in September), and the services PMI slipped to 51.7 (from 53.0). Separately, the ECB’s September inflation survey was little changed. The one-year expectation of 3.1% compares with August’s 3.0%. The three-year expectation was steady at 2.9%.

• Late today, Moody’s will announce the conclusion of its review of France credit worthiness. It current Aa3 rating is two notches above the S&P and Fitch. Moody’s has a negative outlook, and a two-step catch-up move seems likely.

• The UK reported September retail sales (-0.1% vs. median forecast in Bloomberg’s survey for a 0.1% decline. On the other hand, the flash PMI was firmer than expected. Recall that unlike most countries, the UK retail sales are reported on a volume basis so rising prices which have lifted other countries’ retail sales do not impact the British report. The composite PMI rose to 53.1 from 52.0. The manufacturing PMI is 52.8 (from 51.9), and the services PMI is 53.1 (from 52.1).

• Australia’s preliminary composite PMI slumped to 47.7 from 51.3 in September. It is the third consecutive decline and suggests that four rate hikes this year are moderating activity. It finished last year at 51.0. The manufacturing PMI is 49.7 (from 49.6 in September) and is the first back-to-back sub-50 reading since the end of 2024. It was at 52.0 in July and August. The services PMI is 47.8 (from 51.9).

• Japan reported September CPI rose to 2.1% (from 1.9%), and for the first time this year, the core rate rose above the 2.0% target (2.1%). The measure that excludes fresh food and energy rose 2.4% (from 1.9%). The report was largely anticipated by the Tokyo CPI data that was released a few weeks ago. The swaps market remains confident that the Bank of Japan will not raise rates next week and assesses around a 75% chance of a hike at the following meeting in December, down from almost 80% at the end of last week. The market does not typically respond much to the PMI. The October preliminary composite PMI is 52.3, unchanged from September. The manufacturing PMI is 53.3 (from 54.1 in September), and the services PMI stands at 52.0 (from 51.3 in September).

Disclaimer

Risk Appetites Wane: AI Jitters Returns, European Debt Stress Continues, Oil Firms

noreply@blogger.com (Marc Chandler) — Thu, 22 Oct 2026 06:46:37 -0400

Market sentiment is fragile. After earnings helped boost sentiment yesterday, a different set of earnings weakened it today. The broad retreat has seen some signs of risk-off in the foreign exchange market with the yen and Swiss franc leading the major currencies. At the same time, pressures European bond market persist, and the peripheral premiums over Germany are wider. The euro is a laggard and was turned back from about $1.1255 today. Moody’s, which assigns France a credit rating two notches above S&P and Fitch and a negative outlook, will announce the conclusion of its review tomorrow. A downgrade looks inevitable and a two-step catch-up move cannot be ruled out.

The US economic calendar is light and participants in the foreign exchange market will be keeping a close eye on equities. Meanwhile, oil prices remain firm and December WTI is bumping around $100 a barrel.

Prices

G10

• The euro was confined to about a quarter-of-a-cent range below $1.1240 yesterday, with a marginal new session high recovered in the NY afternoon. It reached about $1.1255 today in the Asia Pacific sessions, but as French bonds came under pressure in Europe, the euro slipped to session lows near $1.1215. This third time in five sessions it was turned back from the $1.1260-70 area. The 20-day moving average is near $1.1245, and the euro has not settled above it since September 9. The euro has to prove itself, and in a material sense, given the interest rate differential, one is paid to be long dollars, and it hasn’t yet. Options for nearly 2 bln euros expire today at $1.1200.

• The greenback has broken down today against the yen after it straddled JPY158 in each of the past five sessions. Falling US yields and unwinding of short-yen hedges to long Japanese equity positions sent the dollar to almost JPY156.75 today, a new low for the month. Options for about $1.5 bln at JPY157.50 expire today and some pressure on exchange rate may be related. A break of the JPY156.70 area could signal a move toward JPY156.

• Sterling consolidated yesterday in the upper end of Tuesday’s range. It traded in a little more than a fifth-of-a-cent range around Tuesday’s $1.3380 settlement. Still, it settled above its upper Bollinger Band for the second consecutive session (~$1.3390 today). The market seems stretched after its five-session, 2.7-cent rally that brought it to a potentially important technical level. Still, sterling reached almost $1.3420 today before stalling. The $1.3400 area holds the (50%) retracement of the decline from the late August high (~$1.3675) to the mid-October low (~$1.3135). The highs from the brief consolidation in mid-September also are around $1.3400. The next retracement target is around $1.3470.

• After rallying a little less than 2% in the previous five sessions, the Canadian dollar consolidated yesterday. The greenback did not move more than around 20-pips from Tuesday’s settlement, trading between about CAD1.4040 and CAD1.4080. The US dollar edged down today to about CAD1.4015, its lowest level in a month. Psychological support is seen around CAD1.40, but the retracement objective is near CAD!.3965.

• The Australian dollar’s advance extended to $0.7035 yesterday, a new high for the month. The five- and 20-day moving averages crossed for the first time since mid-September. It made a marginal new high today before risk-off forces saw it pullback toward $0.7005. Yesterday’s low was slightly below $0.7000.

• The Mexican peso tumbled to new lows for the year yesterday and fell further today. The dollar reached almost MXN18.73 yesterday and nearly MXN18.8150 today. The greenback closed firmly and the move does not seem over. A move toward MXN19.0 area does not look unreasonable. We are looking for some kind of climactic top or a reversal pattern, and neither has materialized.

• The dollar continues to trade heavily against the offshore yuan. It fell to CNH6.6715 today and new multiyear low. The grind continues and the direction of travel is still clear. The dollar’s reference rate was set at CNY6.7195 (CNY6.7192 yesterday).

• Foreign equity inflows to participate in Jio Platforms IPO yesterday have coincided with new policies that raised the cost of being short the rupee has helped improve the exchange rate. The dollar was approaching May’s record high earlier this month near INR97 and fell a little below INR94.42 yesterday, its lowest level since September 7. As the equity-related flows eased and oil prices rose, the US dollar posted a potential key upside reversal against the rupee today by making a new low for the move and then recovering and settling above yesterday’s high. The dollar recovered from INR94.3225 to INR94.9425.

Other Markets

• The Nasdaq Composite rose to a five-day high yesterday and closed firmly. The Philadelphia Semiconductor Index traded firmer and posted a four-day high close. However, disappointing earnings have seen AI-related companies lead the equity sell-off today. South Korea’s 3.5% tumble led the Asia Pacific equities lower. Even the tech-light European Stoxx 600 has fallen a little more than 1% today. The Nasdaq 100 futures are off 1.8%, and the S&P 500 futures are around 1% lower.

• The US 10-year Treasury yield traded quietly around 5.10% yesterday and is near 5.06% now. Strains in the European bond market were still evident. The French premium continues to widen. The contagion, of course, spreads to other countries seen to have pre-existing conditions first. It is an unstable situation, and a political realistic near-term off-ramp does not seem obvious.

• The debt strains in Europe do not appear to have helped gold, which slid to a new two-week low today, slightly below $4067. A break of this area could see a return to $4000 or the late June low near $3943. Silver traded quietly yesterday in a little less than a $1 range, about half of Tuesday’s range. It has been sold below Tuesday’s low (~~$56.40) today and there is little on the charts ahead of the $55 area, where it bottomed in June and July.

• Reports that oil flows from the Middle East remain strong despite the increased Iranian attacks saw the December WTI contract pull back from the brief excursion above $100. The contract is trading firmly in about a $97.70-$100.10-range so far today.

Data

• The US reports weekly jobless claims today. It is the closest to a real time labor market reading. The four-week moving average, used to smooth the noisy series, stood at 198.50k. It recorded the modern low in September 2022 at 197.50k. Anything below 200k is notable. In the week of October 3, continuing claims were at 1.71 mln, slightly above the three-year low recorded near the middle of last month (~1.699 mln). Former Fed Chair Powell’s characterization of a low hire/low fire economy still is apt. The index of leading economic indicators and the KC Fed survey are also due but tend not to elicit a market reaction.

• Mexico’s CPI for the first half of October looks little changed. The year-over-year headline rate may tick up to 3.59%, according to the median forecast in Bloomberg’s survey, from 3.49% in the last two weeks of September. The median projection anticipates that the core rate slipped to 3.70% from 3.71%.

Disclaimer

Euro Pressure Persists

noreply@blogger.com (Marc Chandler) — Wed, 21 Oct 2026 06:45:23 -0400

Fears over the AI-meme, which took the semiconductor index down more than 10% last week, has stabilized with the help of favorable earnings by Super Micro Computer and SpaceX. South Korea’s Kospi dropped 14.5% last week amid the anxiety. It rallied 3.3% today and is now higher on the week. On the other hand, the pressure in the European bond market continues. The French 10-year yield is edging closer to 5.00% and the premium over Germany is approached 160 bp. The widening of the peripheral premiums over Germany is seeing the euro underperform.

The US and Canadian economic calendars are light today, and the foreign exchange session may take its cues from the stock and bond markets. The firm oil prices are lending support the Norwegian krone. The Australian dollar extended is gains and is at a new high for the month. The faster UK inflation boosted the market’s confidence of a BOE rate hike early next month and sterling is traded at its best level against the euro since May 2025. Tensions in US-Mexican trade talks keep the peso on the defensive.

Prices

G10

• The euro rose slightly above $1.1260 yesterday and stopped shy of last week’s high recorded ahead of the weekend near $1.1270. It is trading subdued between about $1.1215 and $1.1240 so far today as the consolidative tone continues. Options for 4 bln euros between $1.1195 and $1.1200 expire today.

• The dollar continues to trade within the broad sideways trend against the Japanese yen seen this month. It traded in less than a half a yen range around JPY158.20 yesterday. Today, it has been confined to a JPY158.00-40 range. Options for $1.2 bln at JPY158 expire today.

• After a brief pause on Monday, sterling’s advance that began in the middle of last week from a little below $1.3140 continued yesterday. It reached almost $1.3410, its best level in more than a month. That met the (50%) retracement of sterling’s decline from the August high (~$1.3675). The firm CPI reading has helped underpin sterling today. It is trading firmly within yesterday’s range. The 200-day moving average is near $1.3435 and the next retracement objective (61.8%) is about $1.3470.

• The Canadian dollar strengthened for the fourth consecutive session yesterday, though the two-year discount to the US widened for the first time in six sessions. With the greenback’s losses yesterday, it met the (50%) retracement of the rally that began from the CAD1.3760 area in early September. So far today, the US dollar has been confined to about a 15-tick range around yesterday’s CAD1.4060 settlement. The next retracement (61.8%) is found near CAD1.3965. Initial resistance is seen in the CAD1.4070-CAD1.4100 area.

• The Australian dollar is trading at a new high for the month ($0.7030) in European turnover. It settled above the 20-day moving average (~$0.6975 today) for the first time since September 11. The $0.7025 area corresponds to the (38.2%) retracement of the Aussie’s losses since the early September peak (~$0.7240) and the 200-day moving average is near $0.7050. The (50%) retracement is around $0.7265.

• The Mexican peso continues to consolidate around its weakest level of the year. With minor exceptions, the US dollar remains confined to the range established on October 14 (~MXN18.3550-MXN18.6035). News that the US-Mexican trade talks have been stymied over tariffs on steel and aluminum be a new weight on the peso. This week’s high so far has been about MXN18.55.

• The Chinese yuan continues to grind higher. The dollar has risen against the offshore yuan in only one week since the end of August. Through September, the dollar rose in two months this year after it appreciated in three months in 2025. The roughly 4.5% appreciation of the offshore yuan against the greenback does not sound like much but it is one of the strongest currencies of the year. It has appreciated by 8.5% against the euro and 5.2% against the yen. It is flat today, consolidating inside yesterday’s range. The PBOC shaved the dollar’s fix today to CNY6.7192 (CNY6.7200 yesterday), a new four-year low.

• The Indian rupee continues to be squeezed higher by the central bank’s efforts to stabilize the currency. The Reserve Bank of India’s tightening foreign exchange rules spurred a seven-day rally before yesterday’s holiday. Since the high set October 7 (~INR96.85), the dollar fell almost 2.2% by the end of last week. The dollar was sold to INR94.4175 today, a new low since September 7. Last month’s low was slightly above INR94.27.

Other Markets

• US equity indices recovered from early losses, but nervousness about the AI theme saw the Nasdaq underperform. However, favorable tech earning reports have helped lift the tone today. The large bourses in the Asia Pacific region advanced but Hong Kong, China, and India, with South Korea leading the way with a 3.3% rally. Europe’s Stoxx 600 is up for the first time this week (~0.5%). The Nasdaq 100 and S&P 500 futures point to a higher open.

• The US 10-year yield remains in the range set last Thursday (~5.03%-5.16%). It settled slightly above 5.07% last week and is near 5.13% now. In a volatile session yesterday, European benchmark 10-year yields finished lower but the French premium to Germany settled above 150 bp. European yields are 3-7 bp firmer and the peripheral premiums are wider.

• Gold sulked to a three-day low yesterday, slightly below $4112. It looks heavy despite the pullback in rates and softer US dollar. It has edged down to almost $4106 today. Last week’s low was a little above $4073 and that appears to be the next technical target. Silver traded on both sides of Monday’s narrow range and reached a four-day high (~$58.60). It settled above Monday’s high but there has been no follow-through today. It has come back softer and was sold to about $57.10, as it trades softer but within yesterday’s range.

• December WTI traded in a wide range yesterday: ~$95.25-$101.35. It traded on both sides of the range of the past two sessions. It is trading firmly today and is recording session highs late in the European morning above $100.

Data

• Mexico reports August retail sales today. They fell in June (-0.4%) and July (-0.1%). Retail sales have averaged a monthly increase of 0.1% through July. In the first seven months of 2025, Mexican retail sales rose by an average of 0.3% a month.

• The UK CPI rose by 0.4% io September, lifting the year-over-year rate to 3.5% (from 3.1%). That is a new high for the year and a little firmer than expected. The core rate rose to 2.8% from 2.6%, where it had been stuck since May. The September reading is the highest since March. Service inflation accelerated for the first time since May. It has risen 3.7% year-over-year, up from 3.4% in July and August. The swaps market has had more than an 80% chance of a Bank of England rate hike discounted for the next meeting in early November since October 2. The odds have edged up to nearly 100%. Separately, the government’s finances show that British debt exceeded GBP3 trillion for the first time. The deficit in the April-September period widened to GBP97.8 bln, which is about GBP6 bln more than the Office for Budget Responsibility projected in March. This may intensify the challenges for the government when it presents the budget next week.

• There is a strong seasonal pattern for the Japanese trade balance to improve in September. There has been one exception (2014) in the last 20 years. True to form, the deficit fell to about JPY537 bln from JPY1.11 trillion in August. One cannot deduce Japan’s trade balance from the valuation of the currency. The OECD’s model of purchasing power parity has the yen almost 63% undervalued. Through September, Japan has recorded a JPY3.32 trade deficit compared with a JPY3.09 trillion shortfall in the first nine months of 2025 and a JPY4.23 trillion deficit in same period in 2024.

Disclaimer

AI Anxiety Returns, Peripheral Premiums Widen in Europe, and Oil Extends Gains

noreply@blogger.com (Marc Chandler) — Tue, 20 Oct 2026 06:46:48 -0400

The US dollar is mostly softer as AI worries resurface. A dismal showing of an IPO for an AI infrastructure company in South Korea seemed to renew last week’s concerns. The Canadian dollar is leading the charge today after the secessionist referendum in Alberta lost handily. The UK reported better-than-expected employment figures, which helped lift sterling.

In addition to the AI concerns, investors are monitoring two other developments today. First, Iranian strikes are lifting oil prices. Brent is at a five-month high and the December WTI contract is above $100. The Norwegian krone often is sensitive to oil prices, and it is the second strongest G10 currency today behind the Canadian dollar. Second, the social/political tensions in several European countries remain a concern. French 10-years are at new highs, approaching 5% and Italian bonds are also under pressure. The peripheral premiums over Germany are widening.

Prices

G10

• The euro was traded in a narrow range in North America yesterday, mostly between $1.1210 and $1.1230. It spent the entire session below last week’s close (~$1.1240). The early markdown in the Asia Pacific session to slightly below $1.1185, and the single currency largely held above $1.12 since early European turnover yesterday. It continues to trade quietly between $1.1205 and $1.1235 so far today. Options for 3.1 bln euros struck at $1.1265 expire today.

• Firmer US rates helped lift the dollar against the Japanese yen. The greenback made a new session high in North America near JPY158.55. It edged up to JPY158.60 today to fray the 200-day moving average but has come back off to approach JPY158 in Europe. A break could signal a test on last week’s lows, near JPY157.55.

• Sterling traded with a slightly heavier bias yesterday, but it was confined to about a 20-tick range on both sides of the pre-weekend settlement. It slipped ever so slightly below $1.3300 in the NY afternoon. It has held above $1.3300 today and reached almost $1.3360 on the back of better-than-expected jobs data. Last week’s high was a little above $1.3370. It has not settled above $1.34 since September 15.

• The Canadian dollar strengthened for the third consecutive session yesterday. Despite a little softer than expected Canadian September CPI, the two-year yield jumped 10 basis points and the narrowing of its discount to the US may have helped extend the Canadian dollar’s recovery. The greenback was sold to almost CAD1.4070, a three-and-a-half-week low. The US dollar also surpassed the (38.2%) retracement of the rally from the November 8 low (~CAD1.3760). News that the secessionist referendum lost handily in Alberta (~75% rejected it) the Canadian dollar is trading firmer. The US dollar eased to below CAD1.4050. The (50%) retracement is about CAD1.4030. Chart support is seen around CAD1.4000.

• The Australian dollar traded firmly yesterday, and although it reached a three-day high, it stalled in front of $0.7000. It edged a little closer to $0.7000 but has not traded above it, though it could in North America today. It has not settled above $0.7000 in three weeks. In the middle of last week, it reached an intraday high of almost $0.7015. The $0.7025-50 area holds the 200-day moving average and the (38.2%) retracement of the losses since last month’s peak (~$0.7250).

• The US dollar initially rose against the Mexican peso yesterday and poked slightly above MXN18.55. However, the greenback trended lower in Europe and North America and slipped below MXN18.41 before consolidating. A near-term shelf has been forged MXN18.34 in the second half of last week. The dollar slipped to around MXN18.3750 today before it rebounded to MXN18.4735. It looks poised to re-test yesterday’s high amid a risk-off session.

• The dollar slipped against the offshore yuan yesterday and posted a loss for the third consecutive session. That matched the longest losing streak in two months. It has eased again today and reached almost CNH6.6765, encouraged by the PBOC. The PBOC continues to guide the yuan higher. The dollar’s fix was set at CNY6.7351 at the end of September and CNY6.7208 yesterday and CNY6.7200 today.

• Indian markets are closed today for a national holiday (Dasara).

Other Markets

• The Nasdaq Composite rose by about 1.5% yesterday, its best gain in nearly a month, even if not fully retracing the pre-weekend loss of 2.15%. However, the disappointing performance of a South Korean AI-infrastructure company IPO (Elice) renewed the concerns over AI and is weighing on equities more broadly. South Korea’s Kospi fell by 3.7% but all the large bourses in the region fell. A notable exception in Indonesia, where measures adopted to address the MSCI concerns helped lift the Jakarta Composite by almost 5.7%. Europe’s Stoxx 600 is off around 0.75%, and US Nasdaq 100 and S&P 500 futures are trading with a heavier bias.

• Benchmark 10-year yields jumped in Europe and North America yesterday. The French 10-year premium widened by 11 bp over Germany yesterday to 148 bp. It was a new settlement high since the end of 2011. The French yield reached 4.83%. The high from earlier this month was almost 5%. With the Nasdaq rallying, the 10-year US Treasury yield jumped a little more than seven basis points (to almost 5.15%) after falling about 16.5 bp last week. The 10-year JGB yield slipped a basis point today (now below 2.89%). European yields a narrowly mixed, but the 10-year French and Italian bond yields are a couple of basis points firmer, and their premium to Germany is widening. The 10-year US Treasury yield is off a little more than a basis point.

• After reaching $4190 yesterday, gold was sold to new session lows in North America, near $4139. It frayed the 20-day moving average for the second consecutive session but has failed to close above it since September 3. It has been sold to a new three-day low today, slightly below $4112. Last week’s low was around $4073. Silver traded quietly yesterday between slightly above $57.00 to about $57.85. It was also sold to three-day low today, around $56.40, before recovering back above $57 in late morning European turnover.

• December WTI traded firmly within the pre-weekend range. The early pullback to almost $96.70 was bought and the contract recovered to $98.80 in the North American afternoon. The pre-weekend high was about $99.35, and it took it out today, rising to almost $101.

Data

• The US reports September housing starts, which the median forecast in Bloomberg’s survey anticipates the first increase since June. Still, despite higher prices and interest rates, housing starts in the first eight months of the year are a modest 1.1% lower year-over-year. Permits, a leading indicator, are off less than 1%. Pending home sales had a strong Q2 but fell in July and August. Still, they are nearly flat on year-over basis this year. The October Philadelphia’s Fed non-manufacturing survey is also due. The manufacturing survey, released last week, was weaker than expected at 20.9, down from 37.8. The non-manufacturing survey has been negative this year, except in July, and also contracted every month last year.

• The eurozone’s August current account surplus stands at 8.7 bln from 27.6 bln in July and nearly 20.6 bln euros in August 2025. Despite China’s import penetration, EMU’s current account surplus is modestly lower this year. It averaged 23.1 bln euros in the first eight months of 2025 and about 20.9 bln euros in the first eight months of this year. The ECB’s staff expects it to narrow to about 1.5% of GDP this year from 1.7% last year. Separately, construction output in August jumped 1.8% after July’s flat reading was revised to +0.2%. Despite the infrastructure efforts, construction output has fallen by an average of 0.1% this year after rising by an average of 0.2% a month in the first eight months of 2025.

• Germany’s ZEW survey showed a deterioration of expectations (28.1 vs. 34.7). It was the first decline since April. The assessment of the current situation improved (-35.9 vs. -47.1). It was the fourth consecutive improvement and is the best since June 2022.

• UK labor market was little changed. Average weekly earnings were narrowly mixed, and the ILO measure of unemployment rate fell to 4.7% from 4.9%. That matched the lowest rates since April 2025. The number of payrolled employees (similar to the establishment survey in the US) unexpectedly rose by 13k and the August loss of 26k was revised to an increase of 1k. by 8k in September. The number of people on payrolls had not risen since January. The claimant count jumped by 30.3k, but the sting was lessened by the revision in the August series to 7k from almost 28k. September CPI is due tomorrow and the market the headline to accelerate to 3.4% from 3.1% and the core rate to 2.8% from 2.6%.

• As widely expected, Chinese banks left the loan prime rates steady at 3.0% and 3.50% for the one-year and five-year tenors. The PBOC signaled that its overnight reverse repo rate will replace the current seven-day rate as the new policy benchmark. Since the effective rate is lower than the seven-day rate, there is a modest easing implication.

Disclaimer

Euro Marked Down, China's GDP Firmer than Expected, AI Equities Stabilize

noreply@blogger.com (Marc Chandler) — Mon, 19 Oct 2026 06:42:10 -0400

The US dollar is mixed against the G10 currencies to start the new week. The dollar-bloc and Scandis are firmer, while the euro, Swiss franc, sterling and yen are softer. The euro is weakest after being marked down initially on the social strife in Europe, especially France, the weekend. Peripheral premiums have widened against Germany and is a drag on the euro. On the other hand, equities, including some AI-related names stabilized today. South Korea’s Kospi, which was tagged for nearly 14.5% last week, settled 1.75% higher today, and the Nasdaq 100 futures are up 1%.

China’s Q3 GDP was reported a little stronger than expected (1.2% quarter-over-quarter vs. 0.9% in Q2), though the growth in retail sales (used as proxy for consumption) lagged behind industrial output (used a proxy for exports). The PBOC set the dollar’s reference rate at a new multi-year low. The highlight today’s North American session is Canada’s September CPI and Alberta referendum, where the secessionists appear likely to lose. The Canadian dollar is around a three-and-a-half week high.

Prices

G10

• After approaching a key retracement objective near $1.1110 in the middle of last week, its lowest level since May 2025, the euro recovered to almost $1.1270 before the weekend, an eight-day high. The euro was marked down to slightly below $1.1185 in early trading as the French protests over the weekend took a toll. It recovered to about $1.1235 before European markets opened. It as sold back to $1.1185 as the peripheral yields widened over Germany. It is hovering near $1.12 where options for 1 bln euro expire today. We note that the US two-year premium over Germany has narrowed from a little more than 175 bp earlier this month, the most since August 20325 to about 160 bp before the weekend.

• The dollar recorded an inside day against the Japanese yen before the weekend. It was in roughly a 30-tick range on both sides of JPY158. It remains within that range today. The key still appears to be changes in US rates. The US two-year yield fell for the third consecutive week, the longest pullback in two months. The US 10-year yield fell for the second consecutive week, which was the first back-to-back decline since the end of H1.

• Sterling traded slightly above $1.3370 ahead of the weekend, which was its best level in almost four weeks. It settled well off its high but still posted its highest close since September 22. It is trading quietly between about $1.3305 and $1.3340 today. A move back below $1.3280 would be disappointing.

• The US dollar peaked at CAD1.43 in the middle of last week and pulled back to about CAD1.4135 before the weekend. It settled below the 20-day moving average for the first time since September 10. It looks like a downside break and previous support (CAD1.4200) may now offer resistance. US rates softened and the premium narrowed to approach 150 bp after peaking near 160 bp. Speculation that Alberta secessionists will lose today’s referendum saw the Canadian dollar extend its gains today. The greenback fell to slightly below CAD1.4090 and remains near its lows near midday in London.

• The Australian dollar penetrated both sides of this month’s $0.6900-$0.7000 range last week and settled near the middle of it. It is trading in a narrow range of roughly $0.6950-$0.6980.

• The Mexican peso has a six-week slide in tow, coming into this week. It is the longest drop since July-August 2019. And the price action warns that a low has yet to be forged. The peso was resilient to the unwind of yen carry trades but has fallen victim to the unwinding of US dollar-funded carry trades and the unexpected dovishness of the minutes from the recent central bank meeting. The US dollar found support in the second half of last week around MXN18.34-MXN18.35. A convincing push below there would seem to be a prerequisite for any sense that a top is in place. The greenback is trading firmly and is and is above MXN18.50. Last week’s high was near MXN18.6030.

• The offshore yuan reached a new high since July 2022 at the end of last week. The greenback traded down to almost CNH6.6830. It edged a little closer to CNH6.68 today. Since the end of H1 26, the dollar has risen against the offshore yuan in only three of the 16 weeks. The signal has been sent by the PBOC, which set the dollar’s reference rate before the weekend at CNY6.7220, its lowest level since July 2022. The fix was set at CNY6.7208 today. Since the end of H1 26, the dollar’s fix has risen on a weekly basis, twice.

• The Indian rupee rallied about 1.85% last week, the most in almost four years. The central bank has engineered a short squeeze the boosts the costs of selling the rupee. It is trading quietly today. The greenback has been confined to INR94.7565-INR94.9675, inside the pre-weekend range. Initially, it appeared the restrictions applied to Indian banks, but the RBI clarified that the new capital requirements applied to deals for hedging foreign exchange risk, not the market-making function. Yet, raising the cost of hedging foreign investment in India may deter investors, perhaps more from bonds than equities. Through late last week, foreign investors sold about $32.7 bln of Indian equities this year and bought about $8.2 bln of Indian bonds.

Other Markets

• AI-related equities were a drag last week. They are part of the reason South Korea’s Kospi fell almost 14.5% last week. It is off a little more than 20% this month. The Nasdaq Composite was off about 4.5% last week, its second biggest decline since the first week of April 2025 (“Liberation Day”). Europe’s Stoxx 600 gained a little more than 2% last week. Stocks are firmer today, though Japan was narrowly mixed (Topix up, Nikkei down). China, Hong Kong, South Korea and Australia advanced. Europe’s Stoxx is threatening to snap a three-day rally, while US index futures are higher, led by a 1.1% bounce in the Nasdaq futures and 0.50% in S&P futures.

• Benchmark 10-year yields fell last week. Japan and Australian rates fell 8-9 bp. In Europe, they were mostly 5-10 bp lower, and the peripheral premiums narrowed a little. The 10-year Treasury yield slumped almost 17 bp, which is the largest weekly decline since last April. Although the10-year JGB yield slipped, European bond yields are higher, with the 10-=year French yield up nearly 10 bp and Italy up seven. The 10-year German bund yield is up one basis point. The 10-year Treasury yield is little changed, near 5.08%.

• Ahead of the weekend, gold traded above the 20-day moving average on an intraday basis for the first time since early September. The 20-day moving average is around $4183 today. The yellow metal has not settled above $4200 since September 25. It is trading quietly between about $4161 and $4190. Silver was sold as it approached its five-day moving average before the weekend. It is found a little below $57.90 today. Silver was sold to a three-month low last week, near $55.40. The low for the year was recorded in mid-July slightly above $54.75. In subdued trading, it has been confined to ~$57.25-$57.85 so far today.

• December WTI rallied nearly 7.5% between last Thursday’s low (~$92.45) to Friday’s high ($99.35). It set a new contract high and settled above the upper Bollinger Band for the second consecutive session ($97.95 today). It is consolidating between about $96.70 and $99.25 today. According to AAA, the average retail price of gasoline has fallen this month by about 17-cents a gallon to $4.30, and the average price of diesel has fallen by about 12-cents a gallon to $6.33.

Data

• It is a light week for US data. The main feature is September housing starts and pending home sales. Fed officials are in the pre-meeting blackout period. Despite the firm CPI print last week, that derivatives market sees around a 20% chance of a hike next week, but has the next move fully discounted for the December meeting. Another hike is priced in by the end of Q1 27 and one more is nearly fully discounted by the end of Q2 27.

• Canada reports September CPI today. The Bank of Canada has noted upside risks to inflation and downside risks to growth. The latter may be materializing after the economy shed 70k full-time positions in August-September and unemployment rose to a three-month high (6.5%). The swaps market sees a little more than 10% chance of a hike next week and about an 85% chance of a hike before the end of the year. Two hikes are fully discounted before the end of Q1 27. Alberta holds its referendum today. The surprise would be if there was majority support for the beginning of a legal process for secession, and that would likely be expressed by sales of the Canadian dollar. However, the impact of preferring the status quo would likely have negligible impact.

• The eurozone reports August current account tomorrow. Despite ongoing anxiety over China Shock 2.0, the current account surplus is holding up rather well this year. The average monthly surplus this year through July is about 22.7 bln euros. In the first seven months of 2025, the average monthly current account surplus was about 23.5 bln euros. In the same period in 2024, the average monthly current account surplus was a whopping 36.4 bln euros and in 2023, the average through July was a lowly 16.8 bln euros.

• Japan reported at the end of last week that August industrial output was weaker than it has initially estimated. Industrial production fell 2.4% instead of -1.7%. And earlier today, it reported that its service sector (tertiary industry index) fell by 0.1% and the July gain of 0.4% was revised to 0.2% (0.4% in July). The swaps market is pricing in about a 5% chance of a rate hike by the BOJ next week. The market’s confidence of a hike in December has been pared back a bit. The swaps market still has about an 80% confidence of a hike in December and at least two more moves next year.

• China reported Q3 GDP rose 4.5% year-over-year (4.3% in Q2). The quarterly pace edged up to 1.2% from 0.9% in Q2. The September details were mildly encouraging. Retail sales and industrial output appear to accelerate slightly, but fixed asset investment and property investment continued to contract. Given the campaign again involution, the decline in capex may be desired. Recall, several stimulus measures, mostly, apparently on the supply side, were announced over the past couple of weeks.

Disclaimer

Week Ahead: Rates, AI, and Oil

noreply@blogger.com (Marc Chandler) — Sat, 17 Oct 2026 06:52:24 -0400

In understanding and anticipating exchange rate movement we often privilege interest rates and the drivers of capital flows instead of trade flows. However, a new player may have entered the game. Or perhaps, more aptly, left the game. The AI meme may have cracked. From 30k feet, the semiconductor index illustrates this. The index fell by more than 10% last week, the biggest weekly slump since the first week of April 2025 (Liberation Day?). Given the AI-related contribution to US growth, and the wealth effect through the stock market, the mark down of the chip stocks seemed to cap yields. Imagine: Last Wednesday and Thursday, the yield on the 10-year Treasury note fell from almost 5.33% to 5.03%. The two-year Treasury yield fell from 4.95% to 4.68%.

Yet, ahead of the weekend, as US rates traded higher, the dollar was lifted from its lows but still finished lower against the G10 currencies but the Japanese yen, which was practically flat. The semiconductor index finished art new lows since mid-September, and in what appears to be a fairly light economic calendar but for the flash PMI at the end of the week ahead, it may continue to influence activity. The UK and China are notable exceptions of the light economic calendar generalization. The UK reports jobs data, CPI, and retail sales ahead of the following week's much awaited budget. From Beijing, which continues to signal the acceptance of a gradually appreciating yuan, we will get the estimate of Q3 GDP. In recent weeks, the PBOC and Beijing have taken steps to help provincial governments and provide lower interest rates for targeted projects. Lastly, the other 800-pound gorilla in the room is the price of oil. December WTI jumped almost 9% last week, its third consecutive weekly gain. It set a new contract high before the weekend (~$99.35). The generic futures (what a continuous contract would look like) rose more than 10% last week, the most in three months. It reached almost $101.50 before the weekend. Last month's high was $106.75.

Drivers: The 30-day correlation between DXY and the US two-year yield fell to a seven-month low before the firmer than expected September CPI last week, slightly below 0.30. The correlation may turn more robust, but the data schedule is light, and Fed officials have entered the "blackout" period ahead of the FOMC meeting on October 27-28. Given the US growth, which the Atlanta Fed GDP tracker sees 3.5% annualized in Q3, and that it is a significant energy exporter, it is still seen in the best positioned to cope with the global shocks. There may be parallels between the internet bubble and dollar rally and the AI build-out. As we saw a little last week, signs that the AI trade may be cracking is also recognized as dollar negative, at least partly through the rate channel.

Data: After last week's CPI sand PPI, the upcoming data is unlikely to significantly alter market expectations for next week's FOMC meeting. Inflation accelerated but after the Fed's leadership seemed to lean against the need for back-to-back rate hikes, even while recognizing that the central bank is not done, the pricing in the futures market suggests about a little more than 15% chance of a hike this month but is convinced of two hikes between now and the end of Q1 27. The market may be most reactive to the flash PMI at the end of the week, while the Philadelphia Fed's non-manufacturing survey may pose headline risk. September, it seems widely recognized that to the extent that higher interest rates are pinching, the real estate market may be the most sensitive. Housing starts are slower than last year, but marginally. The monthly average through August this year is for a decline of 0.3%. In the first eight months of 2025, housing starts fell by an average of 1.5% a month.

Prices: The Dollar Index met the (50%) retracement of its losses since the 2025 peak, a week before President Trump's second inauguration, last week when it approached 103.00. However, it retreated sharply in the past two sessions and slipped slightly below 101.60 ahead of the weekend. Nearby support may be around 101.40. The momentum indicators have turned down. However, we suspect that consolidation is more likely, and ahead of the Fed, ECB, and BOJ meetings in the last week of the month.

EMU

Drivers: The changes in the euro have become more correlated with changes in the US-German two-year interest rate differential than changes in the US two-year yield over the past 30 sessions (~-0.45 vs -0.22) or changes in the German two-year yield (~0.18). Over the past few weeks, the tension in the European bond market has become a new driver. Consider that as recently as late September, the 30-day correlation between changes in the euro and changes in the French premium over Germany for 10-year rates was slightly inverse and now it is near 0.60, the highest in four months. The correlation of changes in the Italian premium over Germany is around -0.60, which is also the highest since June.

Data: The preliminary October PMI is the most impactful of the data in the coming week. However, with Europe's move to more directly confront China's trade practices, the eurozone current account shows greater stability than one might expect given what is happening in the auto sector. Last month's ECB staff forecasts were that the aggregate eurozone current account was 1.5% this year and next year. It is down from 1.7% in 2025 but is projected to be there again in 2028. It has averaged about 1.7% in the past five years. It is true average that for the previous five years (2015-2019) was almost 2.8%, but that is really an anomaly. It averaged a little more than 1% in the prior five years (2010-2014) and was actually a small deficit on average in the five years before that (2005-2009). Germany's ZEW survey attracts attention. The expectations component has risen for five months through September, but at 34.7, it is still has not fully recovered from the decline in March (new energy shock from the Middle Est war). It was at 58.3 in February and 45.8 at the end of last year. The assessment of the current situation still seems dour at -47.1 in September. Yet, it was the least negative reading since May 2023. At the end of the week, the ECB's one- and three-year inflation survey results will be reported. They are running 2.9%-3.0%, which is 0.2%-0.3% higher than at the end last year, despite the two rate hikes the ECB delivered.

Prices: In the middle of last week, the euro approached $1.1110, which we previously noted was the (50%) retracement of the euro's rally from the early February low last year, near $1.0140. The euro recovered strongly and reached almost $1.1270 before the weekend. The 20-day moving average is near $1.1285, and the single currency has not traded above it since September 10. The momentum indicators are turning higher, but the euro could not sustain the upside momentum ahead of the weekend. The price action seems more suggestive of consolidation than a recovery at this juncture. For that, it may require a close above $1.13.

PRC

Drivers: Through the daily setting of the fix, the PBOC has signaled the desire for gradual appreciation of the yuan. That some still focus on "stealth intervention' by Chinese banks seems somewhat beside the point. The signal is clear, and while we cannot "disprove" that reports of dollar buying by Chinese banks is done at the behest of the central bank, the fact of the matter is that the yuan is among the strongest currencies this year and the dollar fix has been steadily falling. The rest seems like conjecture. The huge trade surplus suggests that the appreciation has not been sufficient to curb Chinese competitiveness.

Data: China reports Q3 GDP and the details for September. The median forecast in Bloomberg's survey is for 0.9% growth quarter-over-quarter, the same as in Q2, and putting the year-over-year rate at 4.4% (from 4.3%). It is too early to see the impact of the modest efforts of Beijing and the PBOC to support the economy. Still, the PMIs point to the likelihood of a minor increase in activity in September. However, property market, including new and used house prices and sales will underscore an unresolved drag. Without stronger guidance by the PBOC, there is no reason to expect that the banks will cut their prime lending rates.

Prices: The yuan continues to slowly grind higher. The offshore yuan reached its best level since July 2022 before the weekend. The greenback slipped below CNH6.6850. The next important psychological target is CNH6.60. If the pace of the yuan's appreciation is sustained, the US dollar could be below CNH6.40 in a year. The median forecast in Bloomberg's survey is for it to be at CNH6.62 in the middle of next October.

Japan

Drivers: The dollar-yen exchange rate has become more correlated with changes in the US two-year yield than the 10-year over the past 30 sessions (~0.45 vs. 0.35). The correlation of changes in the exchange rate and the two-year interest rate differential is near 0.45, while the correlation between the exchange rate and the 10-year interest rate differential is near 0.35.

Data: Japan's September CPI on October 22 will draw the most attention, but the key signal for it has already been released: the Tokyo CPI. It was reported on October and showed a large rise (2.7% from 2.5% on the headline and 2.7% from 1.8% on the core). Yet, because of idiosyncratic elements owing to Tokyo's own subsidies, the increase on the national level is likely to be slightly less. The Bank of Japan has introduced a new measure that strips out "institutional factors" and is released a couple of days after the CPI. Japan will also report September trade balance. Seasonal factors favor improvement. Indeed, there has been only one September in the past 20 years that trade balance deteriorated. By most metrics, the yen remains terribly undervalued, yet it continues to record a persistent trade deficit. In the first eight months of the year, the trade shortfall averaged about JPY347.5 bln (~$2.2 bln). In Jan-Aug 2025, Japan's average monthly deficit was JPY351.2 bln. In the same period in 2024, the average monthly trade deficit was JPY599.3 bln. Japan reports its tertiary activity (services) index. We already know that industrial output tumbled 1.7% in August (preliminary estimate). It increased by 0.4% in July and rose a cumulative 1.0% in the three months through July compared with a 0.6% contraction in the previous three months. The week ends with the preliminary October PMI. In September, the composite PMI was at 52.3, down from 53.5 in August and the lowest since May. It was at 51.5 in October 2025.

Prices: When US rates were rising after the firm CPI reading, the greenback reached almost JPY159, its best level since last September. Japan's finance minister offered some verbal intervention, but it seemed to be the sharp pullback in US yields that took the dollar to JPY157.55 the following day. Despite slipping below the 20-day moving average (~JPY157.95) on an intraday basis in the past two sessions, the greenback settled above it, as it has for the past month. The five-day moving average could fall below the 20-day moving average in the coming days. Since early September, the dollar has not spent much time above JPY159. Nor has the dollar spent much time below JPY157.50 in the past two weeks.

Drivers: Changes in sterling are among the least correlated with changes in the US two-year yield since late Q1 (-0.27). Sterling's 30-day correlation with changes in the UK's two-year yield turned slightly positive for the third time since the end of Q1 but slipped back into a small inversion at the end of last week. Its inverse correlation with the Dollar Index is around -0.89, the most extreme since mid-May. Although the euro was sold last week to new lows for the year against sterling, the two currencies continue to enjoy a robust correlation (~0.90).

Data: On one hand, in the coming days, the UK reports high-frequency economic data that is among the most important in the monthly cycle: employment, prices, and retail sales. The preliminary October PMI at the end of the week is a little kicker. On the other hand, only significant downside surprises or a new shock will dissuade the market, which very confident (~88% in the swaps market) that the Bank of England will hike the base rate 25 bp when it meets in early November. The number of payrolled employees may shrink for the eighth consecutive month. Average weekly earnings growth is slowing gradually, and some measures are not rising as fast as inflation. The core rate of inflation, which excludes not only food and energy, but alcohol and tobacco too, has gradually slowed from the 3.2% year-over-year pace at the end of last year to 2.5% in April. It has been stuck at 2.6% since May but likely accelerated (2.8%?) in September. UK differs from many by reporting retail sales on a volume rather than a price basis. And despite the slowing of earnings and softness in the labor market, retail sales have held up well this year. They have posted an average monthly gain of 0.3% through August. Retail sales rose by 0.2% a month on average in the first eight months of 2025. Still, with the rise in gasoline and diesel prices, there may have been some demand destruction. Lastly, the composite PMI was 52.0 in September, which is slightly above the year's average, though it hit a soft patch in May and June when it slipped below 50. It finished last year at 51.4. Dragged down by services, the composite PMI may have slipped a little in October.

Prices: Sterling made a new low for the year in the middle of last week by a few hundredths of a cent to approach $1.3135. It recorded an ostensibly bearish outside down day on Wednesday, but the signal was wrong. In the past two sessions, sterling rallied from about $1.3185 to a little above $1.3370 ahead of the weekend. It posted its highest settlement since September 22. The five-day moving average kissed the 20-day moving average before the weekend for the first time since early September. The momentum indicators have turned higher. Note that sterling's recovery was so dramatic that after fraying the lower Bollinger Band in the middle of last week, it traded above the upper Bollinger Band ahead of the weekend. Recall that the Bollinger Band is two-standard deviations above/below the 20-day moving average. Sterling's momentum faded as the weekend approached. We anticipate near-term consolidation below $1.34.

Canada

Drivers: Over the past 30-sessions, changes in the US dollar against the Canadian dollar have become less correlated with the two-year interest rate differential and more correlated with changes in the two-year US yield (~0.45 vs 0.37). However, changes in the exchange rate have become even more correlated with the US 10-year premium over Canada (~0.47). Yet, this seems to reflect the increased significance of the US 10-year yield. The 30-day correlation of changes in the US yield and the exchange rate is approached 0.50, the most robust in a year. The correlation of the exchange rate and changes in Canada's 10-year yield is a little more than 0.15. Alberta holds a referendum on October 19. Of the 10 issues, the one that captured the attention of international investors is the one about pursuing independence. It seems unlikely to appeal to a majority, but even a close vote may disappoint because polls in Alberta suggest the issue might not be closed for long. And the investors are aware that the new government in Quebec supports a referendum of their own for secession but only after the 2028 US election.

Data: The September CPI and August retail sales are the data highlights in the coming days, and the Bank of Canada's business survey will be released. Canada's CPI seems relatively tame. Although the year-over-year rate was 3.0% in August, the three-month annualized rate was zero. That might exaggerate the last of pressure and the comparable for September 2025 warns of the risk of an uptick in the year-over-year rate. Still, the underlying core rates are hovering near 2%. Although Canadian consumers took July off (retail sales fell by 0.7%), the monthly average through July is 0.6%. In the first seven months of last year, retail sales fell by an average of 0.1% a month. Even though retail sales likely rebounded in August, the data would seem to give the Bank of Canada little urgency to raise rates on October 28.

Prices: The US dollar chopped between CAD1.42 and CAD1.43 this month until October 15, when it broke down convincingly and fell to about CAD1.4135 before the weekend. Previous support--CAD1.4200--may now be resistance. The momentum indicators are falling, and the five-day moving average is likely to fall below the 20-day moving average next week for the first time since mid-September, which, as it turned out, was before the greenback rallied nearly 3% in the following month. The next technical target is around CAD1.4100, though some consolidation, here too, after a breakout, is a common pattern, as if the market were deciding.

Australia

Drivers: Changes in the Australian dollar have become more correlated over the past 30 sessions with changes in the two-year interest rate differential with the US than changes in US two-year yield (~0.45 vs. ~-0.37). The correlation between the Aussie and changes in Dollar Index is also around -0.40. The correlation of exchange rate and gold has weakened. Below 0.30, it is the lowest this year. It peaked in June near 0.85.

Data: The preliminary October PMI is the only data of note in the week ahead. The central bank has lifted rates four times this year. The impact may be seen in survey/sentiment, but the unexpected weakness in the September employment report was a yellow flag. Manufacturing may be the most vulnerable. It lurched lower in September to 49.6 from 52.0 in July and August. The service PMI softened for the second consecutive month in September. It stands at 51.9. It reached a six-month high in July of 53.6. The composite PMI also fell for two months through September (to 51.3) from a six-month high in July (53.2). The futures market is pricing in about a 35% chance of another hike at the November 3 meeting, which seems rather high.

Prices: In the past week, the $0.6900-$0.7000 range the Australian dollar has traded in this month was violated in both directions, days apart. It finished the week around the middle of the range. The disappointing jobs report and the pressure in the property market encourage investors to begin suspecting central bank is on the sideline after delivering four hikes this year. The futures market has about 20 bp of tightening priced by the middle of next year, the least in a little more than a month. The risk is that the September CPI (October 28) comes in higher and RBA Governor Bullock will not signal an end of the tightening cycle when the central bank meets on November 3. Such reasoning aligns with a break higher but with the five- and 20-day moving averages still falling, it is difficult to be confident of strong price action. Continued consolidation is the default setting.

Mexico

Drivers: Changes in the dollar against the Mexican peso remains strongly inversely correlated with the JP Morgan Emerging Market Currency Index over the past 30 session (~-0.74), though it is the least in two months. Changes in the exchange rate are almost equally correlated with changes in the US two-year yield and the Dollar Index (~0.35-0.40). The exchange rate has become less sensitive to changes in Mexico's two-year yield (~0.03), the least since late February. It peaked in April near 0.70. The peso continues to be sensitive to the overall risk environment, for which we use the S&P 500 as proxy. The correlation is near -0.50. It has been fairly steady since early September, around the least inversion since February.

Data: Mexico's economy contracted by 0.3% in Q1 26 and bounced back smartly in Q2, growing 1.4% quarter-over-quarter. Both numbers exaggerated underlying state of the Mexican economy, which is slow growth of around 1.5% a year. Last year's disappointing 0.6% year-over-year growth spilled over into the early part of this year. The upcoming data, August retail sales, September unemployment, and the CPI for the first half of October are unlikely to change policy makers' nor investors' minds about the outlook. At the end of the week, the IGAE economic indicator, which serves the function of a monthly GDP estimate, will be reported. This year, it has averaged a monthly increase of 0.26 through July, compared with a 0.10 average in the first seven months of the 2025 and 0.17 average in the same period in 2024.

Prices: The dollar extended its surge against the Mexican peso and reached slightly above MXN18.60 in the middle of last week. It consolidated in the last two sessions but there is little to say that a top is in place. The momentum indicators are still rising even if over-extended. It is well below the upper Bollinger Band, found around MXN18.7650. That area may be the initial target on a convincing break of MXN18.60. On the downside, a push below the MXN18.2150 area could signal a consolidative/corrective phase.

Disclaimer

China's Trade Surplus Swells and the Market Awaits US CPI

noreply@blogger.com (Marc Chandler) — Wed, 14 Oct 2026 05:54:12 -0400

(Business travel disrupts the commentary for the next two days, but the weekly will be posted October 17. Thank you for your patience.)

Investors are wary of the unwinding one of the most crowded trades, long the AI ecosystem. Despite cracks, the market remains resilient. So far, the rise in interest rates has not derailed the narrative. The dollar’s fortunes also seem to be to some extent linked the AI. It seems clear that the significant US current account deficit has been largely financed by foreign flows into the US equity market. While some observers see shades of the tech bubble, it is notable that while the Nasdaq Composite peaked in March 2000 and the S&P peaked six months later, the Dollar Index did not peak until January 2002. Even then, the sharp dollar decline did not begin in earnest until April 2002.

The dollar is mixed. The Australian dollar and Norwegian krone are the strongest in the G10, gaining 0.3%-0.4%. The euro, Japanese yen, and Swiss franc are slightly softer. The euro has derived little support from the easing of the tensions within European bond markets. The French premium, for example, as narrowed from over 150 bp to about 135 bp today, while the euro remains trapped in its trough, having recorded new lows for the year on Monday, slightly below $1.1155. Meanwhile, India has engineered a short squeeze of the rupee and the PBOC continues to encourage a gradual appreciation of the yuan through its daily fix.

Prices

G10

• The euro consolidated yesterday but was unable to rise above Monday’s high (~$1.1220). The tone remains fragile. It is in a narrow range today ahead of the US CPI (~$1.1195-$1.1210). A move above $1.1235 would help improve the technical tone, but the $1.1280-$1.1300 area offers more important technical resistance.

• The dollar is consolidating against the yen at the upper end of where it has been since early September. It is in less than half of a yen range today but is bid note JPY158.50 in late morning European turnover. It stalled yesterday after it settled above the 200-day moving average on Monday for only the second time since September 2. If the JPY158.75 represents the near-term high, support is seen in the JPY157.50 area.

• For the better part of three weeks, sterling has been in a roughly $1.3180-$1.3310 trading range. The lower end held on Monday, and sterling reached almost $1.3260 yesterday. The gains have been extended to $1.3275 today. A push above the 20-day moving average (~$1.3265), which it has not settled above since late August could be promising.

• For nearly two weeks, the US dollar has been chopping between CAD1.42 and CAD1.43. It tested the upside at the end of last week, following the disappointing jobs report and yesterday, it approached the lower end of the range. It slipped slightly below CAD1.42 in Asia Pacific turnover today but returned to around the CAD1.4220 area in the European morning. The Canadian dollar has been weighed down by a wide policy rate differential and reflected in the two-year interest rate differential. The greenback’s momentum indicators are stretched, and we favor a downside break but remain concerned that the policy gap may persist well into next year.

• The Australian dollar recovered from a three-day low yesterday (~$0.6950) but still held below Monday’s high near $0.6995. Follow-through buying today lifted it above $0.7000 for the first time this month. It is probing the $0.7010 area and a convincing move above it would be constructive, but the Aussie must re-establish a foothold above the $0.7030-40 area to boost confidence a low has been forged.

• After the dollar held MXN18.20 on Monday, it rebounded against the Mexican peso yesterday and reached almost MXN18.40. The dollar edged up slightly through MXN18.42, but it is making new session lows in Europe near MXN18.3550. Most Latam currencies slipped yesterday. The Colombian peso was the notable exception. It rose by almost 0.6% and briefly edged above last week’s highs.

• The dollar traded quietly against the offshore yuan yesterday. It traded on the CNH6.69-handle. It remains there today. We note the decoupling of the offshore yuan and broadly dollar move. As recently as early September, the 30-day correlation between changes in the Dollar Index and changes in the USD vs. CNH was about 0.74. It is now around 0.25, the lowest since February. The PBOC set the dollar’s fix at a new low today, CNY6.7249 from CNY6.7298, yesterday. It is the fourth consecutive lower dollar fix in the five sessions since the mainland markets re-opened from the Golden Week holidays.

• The dollar gapped lower against the Indian rupee on Monday and Tuesday as the Reserve Bank of India engineers a powerful short squeeze. The dollar approached INR97 last week and INR95 yesterday. The dollar gapped lower again today and fell to almost INR94.75 today. However, the greenback recovered, closed the opening gaps and returned to above INR95.00.

Other Markets

• US equities settled a little lower yesterday. Still, both S&P 500 and Nasdaq settled above opening levels. Asia Pacific equities traded heavily today. Among the large bourses, only Taiwan and New Zealand expanded. Europe’s Stoxx 600 is up around 0.6% in late morning turnover. If sustained, it would be the third gain in four sessions. The US index futures are trading with a slightly firmer bias.

• Benchmark 10-year yields continue to pullback today. Most European yields are 1-3 bp lower and the peripheral premiums are narrowing slightly. Bank of England Chief Economist Pill was skeptical over the market pricing in four BOE rate hikes, and this appears to have helped support UK Gilts, where the 10-year yield is off five basis points (to 5.39%). The 10-year US Treasury yield is off 1.5 bp to slip back below 5.20%.

• Gold held below Monday’s high (~$4217) yesterday and slipped to session lows in the North American afternoon near $4147. It slipped to around $4141 in Europe today and may retest last week’s low (~$4066) broad consolidation continues. Silver looks heavier and has taken out last week’s low (~$58.50). The next area of support is seen in the $55-$56.50 area.

• November WTI reached a new two-week high yesterday, slightly above $95. It settled a little lower and has not closed above $95 since September 18. It reached $95.40 today but has pulled back to a little below $94.40 in Europe. Market sentiment has soured and optimism has been replaced with fear that the war will persist. The March 2027 WTI contract rose to $90.55 yesterday, a new contract high. It settled a little below $83 on September 14.

Data

• The focus is on today’s September US CPI. According to the median forecast in Bloomberg’s survey, the headline rate may have risen by 0.6% (0.4% in August) for a 3.6% year-over-year pace. In August it was 3.4%. The core rate is seen rising by 0.2% (0.3% in August for a 2.5% pace (2.4% previously). Expectations of an October Fed hike peaked in late September around 70%. Encouraged by comments from the Fed’s leadership, though not Chair Warsh, market expectations have retreated to around 20%, where they continue to hover.

• China reported that September CPI edged up to 0.9% (from 0.8%) and PPI rose 5.0% (from 3.8%). Food prices continue to fall. The 1.7% year-over-year decline matches the most this year. Non-food prices rose 1.5%, matching the most since May. Core CPI was flat at 1.0%. The September trade surplus widened to $133.5 bln from $119.1 bln in August. Exports were up 36.3 year-over-year (25.0% in August), while imports were up 31% (28.2% in August). Lastly, aggregate financing in September rose a little more than expected. On Monday, China reports Q3 GDP. The quarter-over-quarter pace is expected to tick up to 1.0% from 0.9%.

Disclaimer

Softer Rates, Heavier Dollar

noreply@blogger.com (Marc Chandler) — Tue, 13 Oct 2026 06:43:57 -0400

The pullback in bond yields is the main development in the global capital markets today. Rates eased in Asia Pacific, but the eye of the storm has been in Europe and benchmark 10-year yields are off mostly 4-7 bp today. The move is being led by France and Italy. However, the fundamental driver, outside of lower (~2%) oil prices seem elusive. The protests in France continue. In the US, where the 10-year yield is off around five basis points to below 5.20% for the first time in a little more than a week, there is speculation that the Treasury is considering reducing the coupon supply in quarterly refunding and perhaps doing away with the 20-year bond altogether and replaced with bills.

The US dollar is trading softer amid the lower interest rate environment. The Canadian dollar is the laggard. The disappointing jobs data before the weekend make it more difficult for the Bank of Canada to close the policy rate gap, which is the widest since the late 1990s. Among emerging market currencies, Indian officials have engineered a powerful short-squeeze, and the rupee is up around 0.5% today. It gained almost 1% yesterday. Even as China’s 10-year yield slipped it lowest level (below 1.65%) in more than a year, the PBOC set the dollar’s reference rate at its lowest level since January 2023.

Prices

G10

• Although the narrative of China Shock 2.0 would have suggested that the EU-China trade agreement might have taken some pressure of the euro, but this was not the case. The euro was sold to new lows for the year, slightly below $1.1155. The more immediate cause of pressure in Europe, domestic unrest in several countries seems less a function of China’s import penetration and more like homegrown dissatisfaction with the policy. French bonds underperformed again yesterday and the peripheral premiums over Germany widened. It stabilized today and reached almost $1.12 before the buying dried up.

• The dollar has been knocking against a cap against the Japanese yen around JPY158.50, which, in thin markets yesterday, it overcame. That also was where the 200-day moving average was found. It reached about JPY158.75 yesterday and has held below there today. Lower US rates have arguably helped drag the dollar to around JPY157.85 in early European turnover. It is straddling the JPY158 area ahead of the North American session. Options for almost $685 mln struck there, expire today.

• Sterling initially reached a three-day high, near $1.3260, before losing the momentum and returning to the $1.3200 area in quiet turnover yesterday. The low held today and sterling recovered to around $1.3245. The broad consolidation continues. outperformance of the euro continues, and sterling was a new low since June 2025. The euro reached almost GBP0.8440 today. There is little on the charts before GBP0.8400.

• An unexpectedly poor September jobs report weighed on the Canadian dollar before the weekend. It fell to a marginal new low for the year, with the US dollar stalling ever so slightly shy of CAD1.4300. Last week’s price action reinforced the significance of US dollar support at CAD1.4200. It is consolidating within last Friday’s range (~CAD1.42-CAD1.43) and within yesterday’s range (~CAD1.4240-CAD1.4290).

• The Australian dollar tested a nine-day high, near $0.6995 yesterday. It held, and the Aussie slipped back toward $0.6955. The Australian dollar is trading quietly today in about a quarter-of-a-cent range above $0.6950, where options for A$850 expire today.

• Dovish Banxico minutes and slightly softer-than-expected September CPI last Thursday fueled a sharp two-day loss for the Mexican peso at the end of last week. Those two sessions saw the peso tumble by about 1.4% to a new low for the year. The greenback reached almost MXN18.50. Stronger than expected August industrial production figures yesterday helped stabilize the peso. The dollar eased to about MXN18.2150. It is consolidating below MXN18.28 today. A break below MXN18.20 would be constructive, but the dollar must fall below the MXN17.90 area of boost confidence a high is in place.

• The dollar made a marginal new low against the offshore yuan yesterday; finding support slightly above CNH6.69. It is holding today, and the greenback is capped near CNH6.70. Since April 2025, when the appreciating trend began, the offshore yuan has appreciated by almost 10%. The PBOC continues to signal willingness to accept the gradual appreciation of the yuan and set the dollar’s fix at a new low since 2022 today (CNY6.7298 from CNY6.7313 yesterday).

• The Indian rupee consolidated today after surging nearly 1% yesterday in response to broad measures unveiled by the central bank to defend the currency. Among the steps announced, the central bank created a new facility to meet the state-run oil companies’ dollar needs and boosted the reserve requirement for certain types of foreign exchange derivatives. Last week the Reserve Bank of India hiked its repo rate for the first time in almost four years. The dollar gapped lower yesterday, and with the help of intervention, fell to about INR95.5940, its lowest level since September 23. Still, the greenback settled (~INR95.78) slightly above where it opened (~INR95.7575). The US dollar gapped lower again today and fell to almost INR95.00 Like yesterday, the greenback settled near session highs (~INR95.31) and above the open. The rupee gained another 0.50% today. It was the strongest currency in the Asia Pacific.

Other Markets

• Asia Pacific equities were mostly lower yesterday, though among the large bourses, Hong Kong, Australia, New Zealand, and Singapore were exceptions. Equities are mixed today, though the chip sector in Taiwan and South Korea were under pressure. Indian equities led the region with a little more than a 1.5% gain. Europe’s Stoxx 600 enjoyed a firmer tone yesterday amid follow-through buying after the pre-weekend gain of almost 1%. It is advancing for the third consecutive session today and testing last week’s high. With the US Treasury market closed yesterday, US indices managed to eke out a small gain. Nasdaq Composite futures are off by around 0.45%, while the S&P 500 futures little changed.

• With holidays in Japan, Canada, and the US yesterday, the focus was on European yields, which had pulled back a little before the weekend. Yesterday’s rates were mostly softer, but the French 10-year yields rose by about three basis points and the premium over Germany edged higher. However, today, bonds enjoy a strong rally, though the 10-year JGB yield only edged slightly lower to settle below 3%. Benchmark yields are off mostly 4-7 bp in Europe, with France and Italy leading the way. Peripheral premiums are narrower today. The yield of the 10-year US Treasury yield is off almost five basis points to slightly below 5.20%.

• Gold met sellers yesterday after it reached a six-day high, slightly above $4217. The 20-day moving average is nearly $4225, and the yellow metal has not traded above for more than a month. It is trading firmly but mostly within yesterday’s range. Silver reached a three-day high (~$61.45), but sellers emerged and pressured it back to $60.40. Follow-through selling pushed it slightly below $59.60 before it recovered to nearly $60.75.

• November WTI posted an ostensibly bullish outside up day yesterday by trading on both sides of the pre-weekend range and settling above its high. Indeed, the Nov contract settled above the 20-day moving average (~$92.70) for the first time since September 24. It is difficult to verify the “energy ceasefire” between Ukraine and Russia. There has been no follow-through buying today, and instead it has come back offered. It reached $94.30 yesterday and it is hovering near $92 in late European morning turnover, off around 1.8%.

Data

• The US reports existing home sales and the September Federal budget balance. Existing home sales are expected to have fallen for the fourth consecutive month in September. Yet, the average annual pace through August was, if anything, slightly above the average in the first eight months of last year. The US monthly budget report tends not to elicit much of a market reaction, but still the US fiscal position is part of the larger macro story. In the first eight months of the calendar year, the deficit averaged about $170.4 bln. That compares with an average monthly shortfall of almost $157.8 bln in the Jan-Aug 2025 period and $173.4 bln in the same period. Tomorrow’s September CPI arguably is the most important data point of the week, through retail sales and PPI out on Thursday. The median forecast in Bloomberg’s survey is for a 0.6% month-over-month increase in the headline, which would match biggest increase since March.

• Mexico’s August industrial production was reported yesterday. It rose by 0.6 after a 0.5% gain in July. That was the data highlight of the week.

• The minutes from last month’s Reserve Bank of Australia’s meeting that resulted in the fourth hike of the year appeared to shed little fresh light the path going forward. The futures market recognizes the risk that the central bank is not done. Still, does not see better than a 50/50 chance until February 2027. Another move is not fully discounted until next May. The week’s highlight is the September employment report on Thursday.

• Japan reported an unexpected 0.3% decline in September’s PPI. The median forecast in Bloomberg’s survey was for a 0.5% gain. August’s 0.2% decline in August was revised to a 0.3% decline. The year-over-year pace eased to 6.8% from 7.6%. The swap market has about a 5% chance of BOJ hike at the end of the month priced in but is nearly fully discounting another hike in December.

• China will report September CPI and PPI first thing tomorrow. PPI is seen rising to 4.3% from 3.8%. CPI is expected to tick up to 1.0% from 0.8%. That would match the highest reading since May. It was at -0.3% last September. Separately, Visa was granted regulatory approval to begin preparations (that could last a year) to establish a domestic bank card clearing business in China. Mastercard and Amex’s joint venture were given similar period several years ago.

Disclaimer

Week Ahead: Firm US CPI and Unresolved European Challenges Despite Deal with Beijing may Drive Markets

noreply@blogger.com (Marc Chandler) — Sat, 10 Oct 2026 07:06:49 -0400

It is too early to have much confidence that the fever in the bond market has broken, but benchmark 10-year yields in North America, most of Europe, including France and Italy, settled lower on the week. The 10-year JGB yield fell seven basis points to return to 3%. Following successful coupon auctions this past week, the 10-year US Treasury yield eased by almost six basis points to settle near 5.25%. The social strife, especially in Spain and France, continues. France's budget issue has not been resolved. Spain will hold national elections in late November. In the US, the risk is for a hot CPI report on Wednesday.

The US dollar rose against most of the G10 currencies. The Scandis and the Australian dollar were exceptions. They rose by about 0.3%-0.5%. Still, the dollar rose to new highs for the year against the euro, Canadian dollar, Swedish krona, and New Zealand dollar. Since returning from the Golden Week holiday, the PBOC set the dollar's reference rate at a new low since early 2023 (CNY6.7330) before the weekend. Although the momentum indicators for the dollar remain mostly over-extended, we are concerned that a firm CPI will translate into a higher dollar.

Three notable developments took place, outside of the calling of a snap Spanish election and the firewall in Germany cracking as an AfD member was elected to a role like speaker of the lower house of the state of Saxony Anhalt. First, the German government doubled this year's growth forecast to 1.3%, which would be the best 2017 due to government spending and strong foreign demand. That is a nice segue into the second development. The EU struck a deal with the EU that will dramatically reduce the imports of Chinese-made hybrid cars. The details are not yet clear, but the Stoxx 600 autos and parts index rallied on the announcement. The arrangement could be sufficient to hold off more drastic action by the EU. Third, adding to the modest stimulus measures already unveiled, at the end of last week, Beijing announced that it would allow provincial governments to access CNY550 bln (~$82 bln) of unspent bond quotas in previous years to help meet this year's growth target.

Drivers: The DXY rally from a couple of days before last month's FOMC meeting seemed to have been driven by the sharp rise in US rates. The US two-year yield peaked on September 29 near 4.96%. The Dollar Index may have peaked a few days later on October 5. The rolling 30-day correlation of the changes in DXY and the two-year US yield fell from nearly 0.60, the upper end of a three-month range to a little below 0.35, the lowest since March. The strength of the US economy owes in no small measure to government and household borrowing. No other major high-income country is willing to borrow as much as the US as a proportion the its annual output. Wages have not kept up with US inflation for the last five months, the Conference Board and the University of Michigan, surveys point to dismal consumer confidence, yet consumption remains strong, in part, with the help of a 35% increase in the extension of consumer credit, more home-equity loans and drawdown of financial assets (savings).

Data: The US CPI on October 14 is arguably the most important data point of the week. In the three months through August, headline CPI rose at an annualized pace of 0.4%. The core rate has risen by 2.0% at an annualized pace. The PPI is also important, but especially because it provides inputs to the forecast of the PCE deflator, which the Fed targets. The retail sales and industrial production reports may help economists tweak Q3 GDP forecasts. The median projection in Bloomberg's most recent survey is for 2.8% annualized pace, while the Atlanta Fed's GDPNow tracker is 3.6%. The US corporate earnings season kicks into high-gear with the large banks reporting. Bloomberg's survey found expectations that Q3 S&P 500 earnings increased 25% from a year earlier.

Prices: The risk is that an acceleration of US inflation pushes the pendulum back toward a more aggressive Fed stance. The market has been vacillating between discounting 75 bp and 90 bp of rate cuts by the end of H1. The pendulum is at the lower end of the range now. A rise in short-term US rates may see the correlation with the Dollar Index improve from near six-month lows.

EMU

Drivers: The strife in Spain, France, and Germany and dramatic widening of the core-periphery spreads made the dollar, even if, more so, the Swiss franc, a bit of a safe haven. But unlike the Swiss franc, one is paid to be long dollars, in the sense that US ultra short-term rates are above Europe's. At the same time, US equities continue to outperform Europe (over the past three months and year-to-date). The rolling 30-day correlation of the changes in the euro and the German premium over France was slightly inverse as recently as September 22. It was first inversion since January. It is now a little above 0.50, the highest since early June.

Data: August industrial production and trade figures will be reported this week. The markets do not often react to these aggregate figures even if they inform the economic assessments. After growing by 0.6% in Q2 (following a flat Q1), the eurozone economy is expected to grow more steadily but around 0.3% a quarter for the next several quarters.

Prices: The euro fell to almost $1.1160 at the start of last week, its lowest level since May 2025. It reached almost $1.1280 the following day. It chopped in that range for the rest of last week. It does not to have put in an important low yet. Since breaking $1.13 or so, we have warned of risk toward $1.11, which corresponds to the (50%) retracement of the euro's rally from last year's low (~$1.0140). A break may find initial support around $1.1050, but the next retracement target is near $1.0880.

PRC

Drivers: Coming back from the extended national holiday, the market will look for clues of Beijing's intent from the dollar's fix. During the holiday, the offshore yuan chopped the range it set in the week before the holiday. It almost seems as if the market is reluctant to push much below CNH6.70 (~CNH6.6910 was the low on September 21) without continued official confirmation. At the end of last week, the PBOC fixed the dollar at a new three-year low. The signal is that Beijing favors managed gradual appreciation over a rapid adjustment.

Data: Three data points will capture the market's attention this week. Beijing reports September CPI, PPI, and trade figures. Headline CPI rose 0.8% year-over-year in September, while the core rate was 1% higher. Producer price inflation rose to 3.8% year-over-year from 3.5% in July. It peaked at 4.1% in June. The trade surplus continues to be a source of tension especially but not only the US and Europe. It averaged $100.7 bln a month in the first eight months of the year. In the Jan-Aug 2025 period, the monthly average was $97.7 bln. In nominal dollar terms, August exports had risen by a quarter compared with a year ago. Imports were up a little more (28.2%). At the end of last week, reports indicated that Beijing would allow the provinces to access CNY550 bln (~$82 bln) in unspent bond quotas from previous years. This is part of the stimulus effort to support the economy.

Prices: Encouraged by the PBOC's fix before the weekend, the market took the dollar to nearly the four-year low against the offshore yuan recorded on September 21 (~CNH6.6910). The CNH6.67 area may be the next initial target but there may be scope toward CNH6.60 by the end of the year. The median forecast in Bloomberg's survey sees the dollar finishing the year at CNH6.70.

Japan

Drivers: Changes in US two-year interest rates and the dollar-yen exchange rate are not as correlated as they were in May (~0.67) over the past 30 sessions, but it is well above the low in early August (slightly below 0.20) at almost 0.50. The correlation between the exchange rate and the US 10-year yield nearly reached 0.50 in late September. It is now near 0.40. After the intervention, it briefly was inverted. Recent comments by BOJ Governor Ueda have given the market no reason to expect back-to-back hikes and the swaps market has downgraded the chances of a hike later this month to about 10% from around 40% two weeks ago.

Data: Japan reports September producer prices, core machine orders, and the final estimate of industrial production. The data, however, are unlikely to rebuild expectations for a hike at the end of this month. The swaps market is pricing in around a 20% chance, down from 40% as recently as September 28. Japan's economy grew at an annualized rate of 1.9% in Q1, 1.4% in Q2, and the median forecast in Bloomberg's survey is 1.0% in Q3 (and Q4).

Prices: The dollar traded in a little more than a one-yen range below about JPY158.50 last week. It is knocking on the 200-day moving average (~JPY158.55) but has not closed above it since September 2 with the exception of September 24. It roughly corresponds to the (50%) retracement of the dollar losses from the 40-year high on July 23 near JPY164. The daily momentum indicators are stretched but still moving higher and US yields do not appear to have peaked. A push above the JPY158.55 area sees the late September high, near JPY159 next, and the September high was closer to JPY160.40. The market will feel more comfortable challenging the JPY160 area with fundamental cover, like a firm US CPI reading.

Drivers: The rolling 30-day correlation of changes in sterling and UK's two-year yield has not been positive since early April. It is around -0.05, though it did approach -0.50 in June. The correlation of the exchange rate and the US two-year yield is near -0.25. The inversion is more intuitive than with UK rates. Sterling accounts for a little less than 12% of DXY, yet its 30-day inverse correlation is almost 0.80. The euro, which is about 57% of DXY, has an inverse correlation of nearly 0.90.

Data: The week's highlight is the August GDP and details on October 15. The UK economy has been unexpectedly resilient in H1. It grew by 0.6% quarter-over-quarter in Q1 and 0.5% in Q2. It seems off to a fine start in Q3 after July's growth was estimated at 0.4%, the quickest since February. Economists surveyed by Bloomberg anticipated growth slowed to about a 0.2% in Q3, primarily because of projections for slower fixed investment and worsening net exports. The market may be particularly sensitive insight into these sectors.

Prices: For a little more than two weeks, sterling has been chopping in a range, slightly above the low recorded in late June (~$1.3140). Since it broke below $1.33 on September 23, sterling has not managed to close back above it but has not traded below $1.3180 either. Sterling might have traded heavier against the dollar if it were not for the demand on the cross against the euro. The euro was sold to a marginal new low for the year in middle of last week, slightly below GBP0.8450. It does not appear to have bottomed, and near-term potential may extend toward GBP0.8400.

Canada

Drivers: The most important weight that has dragged the Canadian dollar persistently lower has been the inability of Canadian rates to keep up with US rates. The policy rate differential in this cycle is the widest since the late 1990s. The same can be said of the US two-year premium over Canada. The rolling 30-day correlation of the change in the exchange rate and the US premium is around 0.60. It was inverse in late May through mid-June. Changes in the exchange rate are less correlated with changes in Canadian or US two-year rates, and that holds for 10-year yields as well. Some observers still insist that the Canadian dollar is a petro currency but the correlation between the USD-CAD exchange rate and WTI has had three phases this year. Through much of the Q1, there was an inverse correlation that reached -0.44 before the Middle East war. The correlation turned positive, which is to say the Canadian dollar tended weaken against the US dollar as oil prices rose, and stay positive through early July. It is now inverted again, around -0.22.

Data: The disappointing employment report before the weekend, which saw Canada lose more than 35k full-time jobs for the second consecutive month saw the market downgrade the chances of a 25 bp hike before the end of the year to about 85%, the least in about a month, from more than 100% the previous week. The Bank of Canada's decision on October 28 does not hinge this week's data, which is mostly housing starts, building permits, and existing home sales. The monthly portfolio flow report at the end of the week will underscore what we already know; namely the improvement in Canada's external balance this year. Consider that through July, foreigner investors bought a net of almost C$180 bln of Canadian bonds and stocks. In the same period last year, foreign investors bought C$3.5 bln. At the same time, Canada merchandise trade balance has swung into a nearly C$5 bln surplus from a deficit of almost C$22 bln in the first seven months of 2025.

Prices: If the policy and rate gap have weighed on the Canadian dollar, the poor jobs data and the prospect of a firm US CPI reading, warn against expecting near-term convergence. The US dollar held support near CAD1.4200 after testing it several times in recent days. The CAD1.4300 area, which has been approached, corresponds to the (61.8%) retracement of the greenback's losses since the 2025 high, near CAD1.48. A push above CAD1.4300 could target the CAD1.4400-20 area next.

Australia

Drivers: Changes in the Australian dollar's exchange rate and the Dollar Index are inversely correlated (~-0.62), and a smidgeon more but positively correlated with changes in the S&P 500. Similarly, the Aussie is inversely correlated with changes in the two-year US yield (~-0.55) and is nearly as positively correlated with changes in gold (~0.50). Changes in the exchange rates and Australia's two-year yield is near 0.20 and the correlation with the two-year differential is almost 0.50.

Data: The minutes from last month's central bank meeting that resulted in a dovish hike may offer insight on October 13 of the significance of the September employment data on Oct 15. Although Australia lost full-time positions in August (6.3k) the three-month average of a little more than 18k is at the upper end of where it has been for the past couple of years. The economy has added an average of 20.4k jobs a month this year through August, compared with 8k average in the first eight months of 2025. The unemployment rate has marched steadily higher from 4.1% in January to 4.6% in August, the highest level in five years. Job growth trails the rise in the participation rate, which has risen this year from 66.7% in January to 67.1% in August. That matches the high since January 2025.

Prices: The Australian dollar consolidated last week between about $0.6930 and $0.6990. It recorded a three-month low on October 1 slightly above $0.6900. The Aussie must re-establish a foothold above the $0.7030 area to lift the tone. That area holds the (38.2%) retracement of the losses from the September 9 high (~$0.7240), the 20-day moving average, and the 200-day moving average. The momentum indicators are turning up but still overextended.

Mexico

Drivers: The minutes from the recent central bank meeting struck the market has more dovish than expected. A majority said they would be willing to consider a rate cut if inflation conditions permitted. It sounds conditional and benign, but when coupled with the signal that it would not react mechanically to what the Federal Reserve does, and elimination of the phrase from previous statements that is expected to hold rates steady, gave the dovish tilt to the third consecutive meeting that the central bank stood pat. This sent the peso reeling. The Mexican peso is often best thought of as a proxy for emerging market currencies broadly. The correlation of the dollar-peso exchange rate and the JP Morgan Emerging Market Currency is fairly stable and robust. The 100-day rolling inverse correlation of change in the two is near -0.73. The 30-day correlation is around -0.76. Changes in the dollar-peso exchange rate over the 30 sessions are more correlated with silver (~-0.40) than gold (~-0.30). The exchange rate correlation with changes in the US 10-year yield over the past 30 sessions than with changes in the US two-year yield have converged around 0.35.

Data: Mexico reports August industrial production on October 12. It has been a choppy time series this year. In the first seven months, it contracted three times, yet it has risen by an average of 0.16% a month compared with an average of 0.01% a month in Jan-July 2025. Mexico's merchandise exports were about 36% of GDP last year. Its goods exports have risen by about 30% this year. The domestic economy looks weak, and growth might have nearly stalled in Q3 after a 1.4% quarter-over-quarter surge in Q2 (-0.3% in Q1).

Prices: The dovish Banxico minutes trigger sharp losses of the peso. Before the weekend, it reached new lows since last November. The dollar reached almost MXN18.50. Between the BOJ intervention and encouraging the unwinding of yen-carry trades and then the jump in US rates, forcing the unwinding dollar-funding trades, the peso was already on the defensive. Even though Banxico's rate guidance was conditional, the market understood the dovish bias. The next target may be around MXN18.55, which corresponds to the (38.2%) retracement of the greenback's decline from the February 2025 high (~MXN21.2930). Above there, and the high from last November (~MXN18.77 comes into view).

Disclaimer

Renewed Pressure in Europe Helps Lift the Greenback

noreply@blogger.com (Marc Chandler) — Wed, 7 Oct 2026 06:41:10 -0400

(Business travel on October 8-9 will disrupt the daily analysis. The commentary will resume with the weekly on October 10. Thank you for your patience. Good luck.)

Renewed pressure in European bonds has sent the euro back below $1.12, nearly a cent off yesterday’s high. Its loss of about 0.6% today leads the G10 currency complex lower. The greenback is also firmer against most emerging market currencies. French, Italian, and Greek bonds yields are up 11-13 bp. British, Spanish, and Portuguese 10-year benchmark yields are up more than 7 bp, while Germany, who reported much stronger than expected industrial output figures is seeing less than a three basis point increase. The 10-year US Treasury yield is up four basis points to 5.32%, a new high.

The risk-off impulse from the rising yields is weighing on equities and precious metals. November WTI is hovering around $90. The Reserve Bank of India hiked its repo rate, as widely expected, and its forward guidance indicated more tightening was likely, but like we have seen several times last month, with the exception of the Federal Reserve, the currency, in this case, the rupee, sold off. With the French government threatening to use its constitutional powers to push through a budget without parliament’s support, sets a danger precedent with Le Pen running ahead in the polls for next year’s presidential election. It is difficult at this juncture to see a near-term path toward resolution.

Prices

G10

• The euro reached slightly above $1.1275 in early North American trading to record the session high yesterday. The roughly 0.20% gain was the euro’s best showing in a little more than a month. However, new pressure on French bonds has dragged the euro back to about $1.1180 today. The 30-day correlation of changes in the euro and the German French 10-year spread is around 0.40, the highest since early June. Monday’s euro low was closer to $1.1160. The (50%) retracement of the euro’s gains from the February 2025 low (~$1.0140) is found slightly above $1.1100.

• The dollar was confined to about a half of a yen range yesterday below JPY158.25. It was the narrowest range since late August. The greenback held its own despite the decline in US yields. Last week’s dollar high and the 200-day moving average are around JPY158.50, which is where it peaked so far today.

• Sterling reached a four-day high yesterday, slightly below $1.3285. Last week’s high was about $1.3310. There has been no follow-through sterling buying. It has pulled back to around $1.3230. In the past four sessions, sterling appears to have forged a shelf in the $1.3180-$1.3200 area. The same does not look true for the euro against sterling. It settled lower yesterday for the eighth consecutive session, and today the euro has fallen to a marginal new low for the year slightly below GBP0.8450. A convincing break could spur a move toward GBP0.8400 next.

• Despite the PQ win in Quebec, the Canadian dollar posted its best session yesterday in nearly a month. True to the pattern, Canada’s two-year discount to the US eased slightly. A break of CAD1.42 could be the first indication that the greenback may have peaked. If that is the case, an initial retracement target may be in the CAD1.4070-CAD1.4100 area. However, CAD1.42 is holding and the wider two-year interest rate differential could lift the greenback to the CAD1.4240-60 area before challenging Monday’s high for the year (~CAD1.43).

• The Australian dollar reached a four-day high yesterday, near $0.6990. A move above $0.7000 targets the $0.7030-35 area, which holds the (38.2%) retracement of the leg lower from the Sept 9 high (~$0.7240) and 200-day moving average. The Aussie is consolidating inside yesterday’s range, but it looks vulnerable on a break of $0.6960. Last week’s low was almost $0.6900.

• The dollar fell for the third consecutive session against the Mexican peso. It is the longest slide since late August/early September. The greenback peaked on October 1, near MXN18.4320 and yesterday, recorded a five-day low near MXN17.9110. The peso was the strongest currency in the region yesterday, with around a 0.60% gain. Follow-through buying of the Brazilian real was limited after Monday’s post-election surge. It mostly consolidated yesterday. After jumping nearly 3.5% in the previous two sessions, the Colombian peso pulled back by around 0.80% yesterday. However, the tone is less constructive today and the greenback is higher against most emerging market currencies today. The dollar has risen to MXN18.07. A move above MXN18.11 could signal a move toward MXN18.17-MXN18.25.

• The dollar traded quietly against the offshore yuan yesterday. It stayed between about CNH6.6995 and CNH6.7060. It is trading quietly today between about CNH6.70 and CNH6.7075. Mainland markets re-open tomorrow. When it closed for the extended holiday, the dollar was at CNY6.7060 and against the offshore yuan, it was about CNH6.7085.

• The Reserve Bank of India hiked its repo rate today for the first time in four years and signal additional hikes will be considered given the currencies weakness and the risk of rising inflation. It lifted its projection for CPI in the year ending March 2027 and upgraded growth to 7.1% from 6.7%. Yet, it was insufficient to underpin the rupee. The US dollar rose to INR96.85, its best level since May 20, when it reached a record high (~INR96.9650).

Other Markets

• The S&P 500 and Nasdaq Composite gapped higher yesterday and new all-time highs were record. However, the mood in the equity market is more somber today. Leaving aside a few small markets in the Asia Pacific area, it was a sea of red, led by the Kospi’s nearly 2% decline and the 1.6% fall in Singapore. Europe’s Stoxx 600 is poised to snap a three-day advance and is off a little more than 0.5% in late morning turnover. US index futures are off around around 0.2%-0.4%.

• The French 10-year yield fell 10 bp yesterday. It was the third consecutive decline and the largest since late May. Italy’s 10-year yield fell by almost 10 bp yesterday, which is also the largest drop since late May. However, tensions have returned today. The French government is threatening to use its constitutional powers to circumvent parliament to push through the 2027 budget. This will antagonize its critics, could further support the political extremes that a running ahead in the polls for next April’s presidential election. The 10-year French benchmark bond yield is up 14 bp today and is approached the recent high of 4.91%. Italian and Greek bond yields are also jumping by nearly as much. The 10-year Germany Bund yield is up two basis points, and the yield of the 10-year Gilt is up eight. The 10-year UYS Treasury yield is up almost five basis points to nearly 5.33%, a new high.

• Gold traded on both sides of Monday’s range yesterday. After being sold to a new two-month low yesterday, slightly below $4105, it recovered to almost $4180. However, it was unable to settle above Monday’s high (~$4170.50). Rising rates and a firmer dollar appear to be dragging it lower today. It is setting session lows in European morning turnover near $4115. It has not traded below $4100 since early August. Silver traded in a roughly $59.70-$62.10 range before the weekend and has remained in that range. However, it looks set to challenge the lows, and a break could signal a move to the $56.50 area next.

• November WTI fell to almost $86.85 yesterday, its lowest level in a month. Reports of higher Mideast flows, and the success of Saudi-led forces against the Houthis appeared to be the main factors. However, Nov WTI recovered to about $89 in the North American morning before stalling. It reached $90.60 earlier today but is struggling to sustain the momentum and is straddling the $90 area.

Data

• There are two US highlights today. First, is the August consumer credit. Wage growth has trailed CPI for the past five months, but spending remains robust. Part of this is due to consumer credit. Consumer credit extension has averaged almost $12.5 bln a month this year up from about $8.4 bln average in the first seven months of 2025. Home equity withdrawals rose by about 9.4% year-over-year in Q2 and there appears to be a withdrawal from investment accounts. Second, the FOMC minutes from the September 16 meeting that resulted in a unanimous decision to hike rates. The Fed funds now imply about a 20% chance of another hike later this month. Still, a hike at the December meeting is fully discounted and the market has 84 bp of tightening priced in before the end of 2027, down about 12 bp from the peak in late September.

• Germany’s August industrial production rose 2.0% after falling 1.2% in July (initially -1.1%). The median forecast in Bloomberg’s survey was for a 0.5% rise. With today’s report, German industrial output has risen by an average of about 0.1% a month this year after it declined by an average -0.1% a month in the first eight months of 2025. Separately, note that the AfD secured sufficient representation in Saxony Anhalt that with support of a small local party to name the speaker of the state’s parliament. The secret ballot gave the AfD four more votes, which may have come from the CDU. It will take a few weeks to form the next government, but the AfD appears to be in a strong position.

• Labor earnings growth slowed in Japan in August. Cash earnings slowed to a 3.8% year-over-year pace, down from a revised 4.3% pace in July (initially 4.7%). When adjusted for inflation, the real cash earnings slowed to 1.5% from a revised 2.0% in July (2.4% originally). On the other hand, the cash earnings, using the same sample base, were flat at 2.8%. Household spending is due later this week, and despite the better labor earnings, it has not risen on a year-over-over year basis this year.

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Collective Sigh of Relief as Oil Prices Drop, Yields Fall, and Stocks Rise

noreply@blogger.com (Marc Chandler) — Tue, 6 Oct 2026 06:44:26 -0400

The US dollar is mixed today, the general tone in the capital markets is constructive. Success by the Saudi-back Yemen forces have recapture strategic territory from the Houthis, which has held drive oil prices lower. Bond yields in Europe have tumbled and the wide peripheral premiums over Germany have narrowed. Equities are higher.

Five Fed officials speak today but barring a surprise, expectations for this month’s FOMC meeting are unlikely to change significantly until next week’s CPI report, where early projections point to a small increase in price pressures. The futures market has about 83 bp of tightening between now and the end of next year, which is down from around 95 bp peak seen in the past two weeks.

Prices

G10

• The euro recorded a low in the Asia Pacific session, near $1.1160 yesterday. It spent the European and North American session in a roughly $1.1185-$1.1220 range. French bonds stabilized yesterday and the 10-year premium over Germany narrowed to 136 bp, which is still elevated. A combination of Le Pen, the leading candidate to become the next French president, promised to reduce public spending and limit further borrowing, a drop in oil prices as the Saudi-backed Yemen forces push the Houthis from strategic territory has seen French and Italian bond yields fall 11-12 bp, narrowing the premium over Germany, and sending the euro higher. The single currency approached $1.1250 in the European morning. A move above yesterday’s high (~$1.1260), which is also where the five-day moving average is found, would help stabilize the technical tone. Still, the options (for more than 7 bln euros) at $1.1300 expire tomorrow and Thursday.

• The dollar recovered from the Asia-Pacific low near JPY157.45 against the yen to the session high around JPY158.30 in North America yesterday. Although that was above the pre-weekend high, last week’s high (~JPY158.45) and the 200-day moving average (~JPY158.50) remained intact. Even then, the dollar’s high from September 24-25 (~JPY158.95-JPY159.05) may be a more important technical level to breech. The dollar is firm today, but within yesterday’s range.

• Sterling recorded an inside day yesterday, trading within the pre-weekend range, which itself was inside the range set last Thursday (~$1.3180-$1.3275). The spring coils further today with sterling confined to slightly less than a half-cent range above $1.3200. The euro approached the low for the year against sterling yesterday that was recorded in mid-July (~GBP0.8455). It recovered to about GBP0.8485 and reached almost GBP0.8495 today. Overcoming yesterday’s high near GBP0.8510 would steady the tone.

• The greenback reached almost CAD1.43 yesterday, and the US two-year premium over Canada widened to almost 159 bp. It was nearly 126 bp three weeks ago. It is a new high for the US dollar since early April 2025 and the widest premium since mid-1997. Parti Quebecois won yesterday provincial election. It promises to hold a referendum on succession during its four-year term, but only after US President Trump’s term ends. Alberta holds a referendum on October 19 and one of the questions is whether it should pursue secession as well. The US dollar is trading firmly but within yesterday’s range.

• The Australian dollar recovered from approaching $0.6930 in the local session to almost $0.6975 in North America yesterday. It stalled a couple hundredths of a cent in front of the pre-weekend high. It settled above the five-day moving average (~$0.6955 today) for the first time in nearly two weeks. The Aussie made a marginal new high today but held below $0.6980. A move above $0.7000 helps lift the technical tone.

• For the first time in two weeks, the dollar settled below the previous session’s low against the Mexican peso. Bolsonaro’s stronger-than-expected showing in Sunday’s election lifted most currencies in the region. The Brazilian real was the best performing, surging by about 4.2%. The Colombian peso rose by 2.0%. The Mexican peso’s gain of about 0.5% was more modest, but sufficient for the dollar to settle below the five-day moving average (~MXN18.14) for the first time since September 9. Follow-through peso buying today saw the greenback approach MXN18.00, a four-day low. A convincing break would initially target the MXN17.85 area.

• The dollar was confined to its pre-weekend range against the offshore yuan yesterday (~CNH6.70-CNH6.72). It slipped slightly below CNH6.70 today for the first time in almost two weeks. Mainland markets re-open on Thursday.

• Despite the pullback in oil and global yields today, the Indian rupee remained under pressure today. The dollar closed the gap from late July, which extended to INR96.3450. Reports suggest the central bank intervened, but the greenback settled near the session high (~INR96.45). The July high (~INR96.6725) is the next important chart point.

Other Markets

• The S&P 500 gapped higher on Friday and the gains were extended yesterday. It reached its best level since August 14. The Nasdaq Composite also gapped higher on Friday and reached a new record yesterday. And these advances are materializing as US long-term rates rise. The US rally lent a positive backdrop for equities today. Nearly all the bourses in the Asia Pacific region advanced today. Europe’s Stoxx 600 is up almost 1%, for its third consecutive advance. US index futures also are enjoying a firmer tone.

• Benchmark 10-year yields in the Asia Pacific region played catch-up today after US 10-year yield rose by 3.5 basis points after being up more than seven intraday. The 10-year JGB yield edged higher and the Australian and New Zealand 10-year yields rose about six basis points. Still, European benchmark yields are off mostly 3-10 bp and the peripheral premiums have narrowed. French, Italian, and Greek yields are off around 10 bp, the German Bund three. The 10-year US Treasury yield is off three basis points as well, to a little below 5.28%.

• Gold popped above $4200 before the weekend but was rejected. It was sold to a new four-day low yesterday, a little below $4123. It took out last week’s low (~ $4111) and fell a little below $4105 before recovering. It is little above $4150 in late European morning turnover. Silver traded with a firmer bias, but it was unable to push above the four-day high set before the weekend (~$62.10). Between $60 and $62.30, it is hard to get excited about silver, and it remains within tht range today.

• November WTI traded yesterday within its well-worn ranges. It was confined to a roughly $89-$92 trading range. The success of the Saudi-backed Yemen forces took back some strategic territory in its attempt to regain control over the Bab el-Mandeb Strait. November WTI was sold to almost $87 today, its lowest level in a month. Around $85 is the next important technical area.

Data

• The US reports the August trade balance today. We already know from the advanced goods trade figures out late last month that the trade balance deteriorated to $132.6 bln from $118.9 bln. It is the largest deficit since March 2025, the month before “Liberation Day”. The median forecast in Bloomberg’s survey is for a $102 bln shortfall after $88.6 bln in July. Note that US gold exports this year are running a little more than twice last year’s pace at around $89.3 bln through July (4.4% of US goods exports vs ~2% in first seven months of 2025.

• Canada reports August’s merchandise trade figures today. There has been a swing in Canada trade balance from a C$21.7 bln deficit in the Jan-July period to a C$4.9 bln trade surplus in the first seven months of this year. Given trade tensions with the Us, the bilateral trade figures may drat attention. In July, Canadian exports to the US fell 6.6%, which was the steepest since April 2025. Overall, 2/3 of Canada’s goods exports were destined for the US market. Canada’s trade surplus with the US narrowed to C$5.9 bln (~$4.3 bln) in July from C$10 .3 bln. The September IVEY PMI is due. It was a four-year high of 64.3 in August.

• The eurozone reported August aggregate retail sales edged up by 0.1% after falling 0.6% in July. Germany reported a whopping 10.6% decline in August factory orders. The median forecast in Bloomberg’s survey was for a 1% decline. The drop was driven by a decline in large orders. Excluding large orders, Germany would have reported a 0.1% decline in August factory orders. Tomorrow Germany reports August industrial output, and it is expected to have risen by 0.5% (median in Bloomberg’s survey) after falling 1.1% in July. France reported a 0.3% decrease in its August industrial production (the median in Bloomberg’s survey was for a 0.2% increase. Still, manufacturing output increased by 0.3%, as expected. Spain reported its August industrial output fell 0.7% after a 0.6% increase in July. Separately, note that Germany and France proposed that at next week’s summit new powers be granted that for the EU that will lower the bar to blocking Chinese imports and that would allow faster action (days). The announcement of the proposal is part of the effort to bolster the EU’s hand in talks with Chinese officials this week. It requires unanimous support and many of the advocates seem to be assuming it, but this still must be proven. Meanwhile, the most immediate and pressing challenge, like the widening of the student (and now teachers and university students strike in France, the demonstrations against the draft in Germany, and the collapse of the Spanish government, and the rise of the AfD in Germany seems to have little to do with China. The people in the street are objecting to their country’s policies and the German and French leadership focused on the challenge from China.

• The UK reported that its September construction PMI rose to 46.1 from 44.3. It is the third uptick in the past four months and the best level since January. It has not been above the 50 boom/bust level since the end of 2024. The AI build-out is not fully compensating for the decline in construction in other sectors.

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