FX becalmed ahead of the weekend and next week's big events

Overview: The dollar is trading quietly, with a slightly firmer today. There has been little follow-through selling after yesterday's setback. The Canadian dollar and sterling are faring best. The yen is a little softer after Tokyo's CPI came in lower as expected due to the government's energy subsidy. The election for the lower house of the Diet is held Sunday. Emerging market currencies are also mostly softer. The JP Morgan Emerging Market Currency Index is poised to settle lower this week for the fourth consecutive week. 

Australian and New Zealand bonds played a little catch-up after the rally in Europe and the US yesterday. European 10-year rates are up 1-2 bp today. The UK's Gilt is an exception. Its yield has come back softer after increasing by around three basis points in each of the last three sessions. Still, it is up about 17 bp this week, ahead of next week's Autumn budget. Note that Fitch review French debt and there is some concern that is negative watch will turn into a downgrade of its AA- rating. The 10-year US Treasury yield is slightly softer near 4.20%, which is about 12 bp higher than it finished last week. The large bourses in Asia were mostly higher, but Japan and India. Europe's Stoxx 600 is slightly firmer, while US index futures point to a higher opening. Gold is continuing to consolidate within Wednesday range (~$2709-$2758.50). December WTI posted an outside down day yesterday, but there has been no follow-through selling today and has spent most of the Asian session and European morning above $70. It is up slightly more than 2.5% this week after tumbling 8.25% last week. 

Asia Pacific

On the heels of the weakest composite PMI since November 2022, Japan reported a slowing of Tokyo CPI. Tokyo's CPI is a robust barometer of the nation's price pressures. It slowed to 1.8% in October from 2.1% in September. The core rate, which excludes fresh food eased to 1.8% from 2.0%. It is the first sub-2% reading since May. The key driver was the government's energy subsides, which shaved about 0.5% from the headline rate. The measure that excludes fresh food and energy was unexpectedly ticked up to 1.8% from 1.6%. Still, there is virtually no chance that the BOJ changes policy next week when it updates its economic forecast., and Governor Ueda noted there is no immediate urgency. The yen's weakness had lifted the odds of a hike in December to the most in a month but after the PMI and Tokyo CPI, the swaps market is finishing the week with seven basis points to tightening discounted. This is slightly less than a week ago. The election for the lower house of the Diet will be held Sunday. Polls show that the LDP may lose its outright majority (233 seats needed) but will maintain it with the help of its coalition partner, Komeito, and the dozen candidates that do not have the support of the LDP due to the funding scandal. Even if the coalition must invite another party into government, the market response is likely to be limited. Lastly, we note that seemed to be little impact on the yen from the largest Japanese IPO in six years. Tokyo Metro raised $2.3 bln in its public offering, and it was 15-times oversubscribed. 

The first decline this week in US 10-year yields yesterday saw the dollar pullback against the yen for the first time this week too. In fact, the roughly 0.6% drop in the greenback was the most this month. The dollar fell to almost JPY151.55 in North America yesterday and slipped to about JPY151.45 earlier today before recovering to poke through JPY152. The greenback looks comfortable between JPY151.40-JPY152.10 through ahead of the weekend. Through the middle of the week, the Australian dollar had fallen 4.7% from the September 30 high to about $0.6615. It overshot the (50%) retracement objective near $0.6645 and has struggled to push above there. The Aussie is pinned near its trough and holding barely above the week's low, which is a two-month low. The next retracement objective (61.8%) is near $0.6575, but a consolidative North American session looks most likely. For the past five sessions, the greenback has been alternating daily between gains and losses against the offshore yuan. It slipped yesterday, which means that for the sawtooth pattern to hold, it will close higher today. In fact, the US dollar is firmer but only a move out of the CNH7.10-CNH7.15 range would be potentially important. The PBOC set the dollars reference rate at CNY7.1090 (CNY7.1286 yesterday, the highest since late August). 

Europe

Growth impulses from the eurozone remain faint. Inflation and inflation expectations have softened. The odds in the of a 50 bp cut in December has barely changed this week and continues to hover around 40%. Also, the swaps pricing of the trajectory of ECB policy in H1 25 has is steady too. It is discounting about 123 bp of cuts, which is slightly lower than where it has settled the past three weeks. This may change next week. The key data point is not Q3 GDP, which may have risen by 0.2%, the same as Q2. And this is without help from the German locomotive. Though the October IFO survey came in slightly better than expected today, the economy may have contracted for the second consecutive quarter and the third quarter in the past four. More important for the ECB's reaction function is the October CPI. At an annualized pace, eurozone CPI was flat in Q3. The headline rate fell to 1.8% (from 2.2%). For that year-over-year rate to fall further, October prices have to have been no better than flat (given that in October 2023, CPI rose by 0.1%). Looking further down field, note that prices fell by 0.6% last November, which warns that before the ECB on December 12, CPI will may be somewhat firmer than it is now. The highlight in the UK next week is the much-anticipated Autumn budget. Chancellor Reeves has confirmed that the Labour government will use a broader definition (Public Sector Net Financial Liabilities) to measure the deficit against, which will allow greater investment (more Gilt supply). Still, Bank of England Governor Bailey's recent comments suggest the central bank will cut interest rates at the November 7 MPC meeting. Lastly, we note that Fitch will announce its review of France credit today. Its AA- rating has a negative outlook. 

The euro had its best day in a month yesterday, rising by almost 0.4%. The move coincided with the first narrowing of the US two-year premium over Germany since October 14. The euro resurfaced $1.08 and rose to $1.0830. The gains were extended slightly today, but resistance near $1.0840 held. It may take a move above $1.0870-75 to begin looking liking like a low is in place. Sterling's rise yesterday was on par with the euro's. However, it continues to hold below Wednesday's high (~$1.2995). A close above $1.30 would help the technical tone. The UK two-year premium is now almost eight bp over the US, nearly twice what it was at the end of last week. 

America

The US reports September durable goods orders and sees the final October University of Michigan consumer confidence and inflation expectation survey. The median forecast in Bloomberg's survey is for a 1% drop after a flat August report. Even though Boeing reported 65 orders, up from 40 in August, the median forecast sees a 0.1% decline, excluding transportation orders (0.5% in August). Today's report, coupled with next week's trade and inventory data will help economists fine-tune forecasts for Q3 GDP, due October 30. The GDP report will incorporate the personal income and consumption data that are released separately the next day. The CPI and PPI steals much the PCE deflator's thunder, though the Fed targets the headline. The earlier inflation reports point to slightly lower deflator (headline 2.1% from 2.2% and the core to 2.6% from 2.7%). Still, the market may be most sensitive to next Friday's US jobs report. The median forecast in Bloomberg's survey is for 135k (254k in September). Canada sees August retail sales today. It is expected to be firm (0.5%) after the 0.9% surge in July. However, what is going to determine whether the Bank of Canada delivers another 50 bp cut in December is most certainly not August retail sales. The swaps market is pricing in almost a 50% chance of another half-point cut. As we noted above the swaps market is pricing in 135 bp cuts from the ECB through the middle of next year, and about 125 bp from the Fed, 108 bp from the Bank of England, and around 95 bp from the Bank of Canada. 

If the Bank of Canada is front-loading its rate cuts, it may help explain why the Canadian dollar is the only G10 currency not to gain against the greenback over the past six months. It is off 1.4%. The second worst performer has been the Norwegian krone, which is up about 0.25%. The Canadian dollar was only G10 currency not to rise against the US dollar yesterday. The US dollar rose to nearly CAD1.3870 yesterday. It traded on both sides of Wednesday's range but closed within it. So far today it has been confined to about five ticks on either side of $1.3850. There are $1 bln in options at CAD1.3855 that expire today and another $1.2 bln that expire there on Monday. Although the US dollar rose to a marginally new two-and-a-half month high, benchmark three-month implied volatility pulled back to a little below 5.1%. Historic (actual volatility) is closer to 4.4%. Both are the least within the G10 universe. The market did not respond much to the slightly firmer than expected Mexican inflation for the first half of October. The peso was little changed yesterday but slightly weaker. It was its first loss in three days, but only after it set a new high for the week in early European turnover yesterday. The dollar neared MXN19.7550. It is trading quietly mostly between MXN19.80-MXN19.84 today. The dollar settled around MXN19.8770 last week.