BOE Initiates Tightening Cycle With Quarter-Point Hike

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.  

EM 

• 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.