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The week ahead could be one of the most consequential weeks here in Q4. Four G10 central banks meet, and two, the Federal Reserve and the Bank of Canada, the market is confident will cut policy rates. The market is also confident that the other two central banks, the European Central Bank and the Bank of Japan, will stand pat. On October 30, the day after the Federal Reserve's announcement, which also may detail the end of its balance sheet unwind efforts (QT), President Trump and President Xi meet in South Korea on the sideline of the APEC meeting. It is difficult to envision China surrendering control of its chokehold on critical mineral processing any more than the US is likely to backtrack from the extraterritorial application of restrictions on semiconductor technology. Nor does it seem likely that they will remove the port fees levied on each other. After the pandemic, many large countries wanted to acquire their own MRNA capacity for vaccinations, so too do they want to secure ability to refine rare earths. 

Ironically, it was easier for the Trump administration to find a path to a Middle East ceasefire than in re-opening the US federal government. Although Hassett, the head of Trump's National Economic Council, told a television audience early last week that the government could re-open in days, with the president in Asia, this seems a remote possibility in the coming week. Indeed, the shutdown could well exceed the record set in Trump's first term of 35 days. Yet, despite the hardship for the thousands of households that miss paychecks and the disruption of government services, the Dollar Index has rallied and US equity indices are at record highs, with gap higher moves ahead of the weekend. Argentina's legislative elections will likely test the ability of America to influence the outcome through what most economists see as a high-risk gambit to support the local currency. 

U.S.

Drivers: The dollar remains sensitive to US interest rates and US-China tensions. Trump and Xi meet on the sidelines of APEC at the end of the week because a bilateral summit could not be worked out by their respective teams. The US federal government remains closed, and House Republicans return to Washington this week. The last floor activity of the House of Representatives was around the middle of June. Both parties continue to think they will secure some advantage by their recalcitrance. 

Data: With the government shutdown disrupting the economic data, private sector reports (house prices and the Conference Board's consumer survey) and Fed surveys (Richmond Fed) are due. The first estimate for Q3 GDP is due but will be reported. Of note, the Atlanta Fed's GDP tracker estimates the economy grew at an annualized rate of 3.9% while the median forecast in Bloomberg's survey is for less than half of that (~1.7%). The highlight of the week is the FOMC meeting that concludes on October 29. There is practically no doubt in the market's mind, reflected in the derivatives market that the Fed will deliver another 25 bp cut in the Fed funds target. The new target range will be 3.75%-4.0%. With reserves falling below $3 trillion and some pressure seen in the money markets, there will be keen interest in what Fed Chair Powell indicates about the unwinding of the Fed's balance sheet (quantitative tightening). There is a reasonable chance that Powell announces its end. However, many expect it to buy bills in size next year. 

Prices: For the past si0x weeks, the Dollar Index has alternated between gains and losses. It rose by about 0.5% last week after falling by around the same amount the previous week. After extending last Friday's (Oct 17) recovery from around 98.00 to reach almost 99.15 in the middle of last week, DXY consolidated firmly but settled in a narrow range (~98.75-99.15). The trendline connecting the August 1 high and the highs earlier this month begins the new week near 99.40, while the two-month high recorded on October 9 is closer to 99.55. The five-day moving average has been above the 20-day moving average for a month and both are trending higher. A band of support is seen around 98.25-55. 

EMU

Drivers: The euro is the un-cola to the dollar's coke. The exchange rate remains sensitive to changes in US two-year yields. The rolling 60-day correlation of changes is near -0.65. It has not been more inverse since the early days of the pandemic. There is a concern Europe will experience collateral damage from the US-China trade conflict. Europe is thought to be preparing a formal response to Beijing's rare earth export controls while many some European auto companies have found a work around after China has retaliated against the Dutch government's decision to seize control of Chinese-owned Nexperia by blocking the company's exports to the Netherlands, which saps the capability of the Dutch unit. Ahead of the weekend, cut the outlook of its Aa3 (AA-) French rating to negative from stable. Recall other three major rating agencies (used by the ECB) have cut France's rating in recent weeks. The French 10-year premium over Germany widened slight for the past six consecutive sessions and finished last week (before Moody's announcement) above 80 bp.

Data: There are three economic reports that will command attention, and the ECB meeting, where policy is on hold. The eurozone will report its first estimate for Q3 growth. It will likely eke out 0.1% quarter-over-quarter growth, the same as in Q2. The same day, October 30, September unemployment is due. Despite the faint growth impulses, unemployment has been bouncing along the trough of the EMU era, 6.2-6.4%, since the end of Q1 24. The following day, the preliminary estimate of October CPI will be announced. Through September, CPI rose at a 2.4% annualized rate, roughly the same pace in the first three quarters of 2024. The ECB's forecasts from last month were for CPI to be at 2.1% this year, 1.7% next year, and 1.9% in 2027. The swaps market sees the ECB on hold for several months. The odds of a rate cut increase to almost 50% by the end of Q1 26 and around 75% by the end of Q3 26. 

Prices: After reaching almost $1.1730 on October 17, the euro reversed lower, and follow-through selling pushed it to almost $1.1575 in the middle of last week. Although the trendline drawn off the August and October lows begins the new week near $1.1570, a break could see a return to the immediate downside risk may extend back to this month's low near $1.1540. The euro recovered to a three-day high near $1.1650 after the softer than expected US CPI before the weekend. The 20-day moving average is near $1.1655, and the euro has not settled above in a month. 

PRC

Drivers: The PBOC continues to guide the yuan, so it tracks the broad movement in the US dollar. The 60-day rolling correlation between changes the dollar against the offshore yuan and the euro is around -0.40 having been close to -0.60 at the beginning of the month. The correlation with the Dollar Index is a little higher, near 0.40 and -0.40 for the Australian dollar. 

Data: China reports September industrial profits. As we have discussed, Chinese companies, with access to patient bank capital, compete for market share rather than profits. The anti-involution campaign wants to change this. At the end of the week, China reports October PMI. Last week's data shows the economy is struggling, though its 0.8% quarterly expansion reported last week would be the envy of most countries, large and small. Beijing has dropped claiming privileges of an emerging market economy at the WTO and the US called for the World Bank to stop providing aid to China. If China's economy is now considered no longer emerging, then its growth is still impressive, even if short of Beijing's targets. The composite PMI has been hovering above 50 but below 51 since the end of Q1. 

Prices: While the PBOC has been gradually lowering the dollar's reference rate at the daily fix, the offshore yuan is trading broadly sideways in a roughly CNH7.11-CNH7.15 range. Of course, because the yuan is managed to shadow the dollar, and the greenback is broadly weaker this year, the yuan has depreciated against other major currencies. Yet, ironically, the immediate concern in many countries is not that China inundates them with goods but that the PRC limits the ability of others to buy rare earths and lithium batteries. 

Japan

Drivers: Japanese political developments appeared to have blunted the role of US 10-year yields guiding the dollar-yen exchange range. The rolling 30-day correlation fell below 0.50 earlier this month for the first time since early July. It is now around 0.55. Changes in exchange rate are less correlated with the 10-year interest rate differential. The correlation peaked this year in early September, near 0.80. It is about half of that now. The correlation of the change in the exchange rate and WTI is a little below 0.50, which is the upper end of where it has been in the past six months. 

Data: It is an important week for Japan and the new prime minister. The BOJ's meeting and important data are concentrated on Thursday and Friday. The two-day BOJ meeting ends on October 30. As recently as the end of last month, the swaps markets were discounting nearly 70% chance of a hike. In recent days it has been hovering around 20%. The central bank will also update its forecasts. The next day, the September employment report is due. The jobless rate jumped to 2.6% in August from 2.3% in July. It matches the high since March 2023. August was a cruel month for Japan's economy. Retail sales fell 0.9% and industrial production fell 1.5% (follows a 1.2% decline in July after a 2.1% gain in June). September is expected to be kinder. Tokyo's October CPI will also be reported. It was steady at 2.5% in September, having fallen from 3.4% in April and May. April was the last time in rose on a year-over-year basis. The core rate peaked at 3.6% in May and was at 2.5% in August and September. The weak September data and the stability of price pressures, for which Tokyo offers a good guide for the national figure illustrates the lack of urgency at the BOJ to raise rates. 

Prices: The dollar has risen against the yen for six consecutive sessions, which matches its longest advance since mid-2024. The advance began from a spike down to almost JPY149.35 on October 17 and briefly poked above JPY153 ahead of the weekend. The six-month high recorded earlier this month was about JPY153.25. A push above there could spur a move into the JPY154.40-80 area. The dollar bottomed this year on April 22 slightly below JPY140. The high for the year was recorded 10-day before President Trump's inauguration on January 20 almost JPY159. 

UK

Drivers: The rolling 30- and 60-correlation of changes in sterling and the euro are slightly below 0.85. That puts the 30-day correlation at the lower end of where it has been in the past month, though it has ranged between around 0.65-0.92 this year. The 60-day correlation is at the upper end of where it has been since the end of July. This year, it has hardly been above 0.85. Sterling is inversely correlated with changes in the two-year Gilt yield. Over the past 30 sessions it has been around -0.40. It reached a three-year extreme near 0.60 earlier this month. Sterling is also inversely correlated with the 10-year Gilt. The correlation was a little over -0.70 at the start of the month, the most extreme since March 2020 and now it is near -0.40. During Truss's brief tenure, it never made it above -0.70. 

Data: Economic reports in the week ahead of mostly consumer credit and mortgage data, which typically do not capture the imagination of market participants. It is unlikely to impact the low expectations (~15%) for a rate cut at following week's Bank of England meeting. The odds of a cut at the last meeting of the year are around 65%, up from about 25% at the end of September. The swaps market sees the terminal rate near 3.40% (currently 4.0%), which is the lowest it has been for a little more than two months. 

Prices: Sterling recorded a nine-day low slightly below $1.3290 after the better-than-expected retail sales and flash PMI. It had stalled near the five-day average and the (38.2%) retracement of the losses from the October 17 high (~1.3470). Sterling settled near $1.3445 at the end of September. On the downside, a convincing break of $1.33 warns of the initial risk to the two-month low (~$1.3250) recorded on October 14. 

Canada

Drivers: The 30-day rolling correlation between the US dollar against the Canadian dollar and the Dollar Index peaked in late August slightly above 0.80, which was the highest since mid-2024. It is now below 0.55, which is the has been since mid-April. The 60-day correlation peaked earlier this month near 0.75, but it has slipped a little near 0.60 now, the lowest since the end of June. The rolling 60-day correlation of changes in the exchange rate and the two-year US yield reached almost 0.55 earlier this month, it highest since late 2022. It is now slightly below 0.50. The correlation was inverse from mid-March this year until late May. President Trump canceled all trade talks with Canada at the end of last week over an Ontario ad that showed a clip of former President Reagan defending free trade. It weighed on the Canadian dollar. 

Data: Of the four G10 central banks that meet this week, after the Federal Reserve the Bank of Canada is the most likely to cut. The swaps market has about an 85% chance of a cut is discounted. The Bank of Canada has sounded more dovish than lately, playing down what appeared to be a strong employment report (106k increase in full time jobs and a steady unemployment rate--7.1%--in the face of expectations of an increase), and suggesting that underlying core inflation is half-of-a-percent lower than the September figures showed (3.0%). The latest US tariffs on wood and lumber warn that the trade headwinds are not over. On Friday, two days after the central bank meeting, StatsCan will report August GDP. Recall that the economy expanded by 0.2% in July after contracting by 0.1% a month in April through June. Canada's economy contracted by 1.6% (annualized rate) in Q2 but is expected to report minor growth in Q3 before gradually strengthening over the next several quarters. 

Prices: The US dollar recorded a big outside day against the Canadian dollar before the weekend by trading on both sides of Thursday's range.However, it settle little changed around CAD1.40.The six-month high was recorded on October 14 near CAD1.4080. With the pre-weekend rally that began from about CAD1.3975, a two-week low, the greenback recouped half of the loss by rising to almost CAD1.4035. Still, the greenback snapped a four-week advance. It is only the second weekly decline since the end of August. 

Australia

Drivers: There has been a dramatic de-coupling of the Australian dollar from the Dollar Index. The rolling 30-day correlation is around -0.20, the least since the early days of the pandemic. It was around -0.80 as recently as last September. The inverse correlation with changes in the US two-year yield has also slackened. It was more than -0.60 in late September and is now positive correlated around 0.20. On the other hand, the risk-off feature has moved into ascendancy. The 30-day correlation of changes in the Australian dollar and the S&P 500 has risen to almost 0.75, its highest since mid-2022. 

Data: The most important data point in the coming week is the Q3 CPI. It rose 0.7% in Q2 for a 2.1% year-over-year pace. The August monthly reading put the year-over-year rate at 3.0%, up from 1.9% in June. The central bank's forecast is for 3.0% CPI this year (3.2% in 2024) and 2.9% next year. The disappointing September employment report (4.5% unemployment from a revised 4.3% in August) and the weaker than expected jobs growth undermined the RBA's arguments about the resilience of the labor market. The futures market saw increased speculation of a rate cut and is now discounting around a 55% chance of a cut, up from about a 35% chance before the jobs report. 

Prices: The US dollar's setback after the soft CPI helped lift the Australian dollar to a nine-day high before the weekend near $0.6530, where it stalled. The top of the recent range was about $0.6535, which is also the (50%) retracement of this month's losses. Above there a band of resistance is found (~$0.6540-60). The daily momentum indicators are turning up, reinforcing our sense that the recent consolidation is forging a base. 

Mexico

Drivers: The Mexico peso's link to the dollar has also slackened. The rolling 30-day correlation between changes in the exchange rate and the Dollar Index has fallen from a little over 0.80 in late September, the highest since 2011 to around 0.25. Instead, the risk environment has become more significant. The inverse correlation with changes in the S&P 500 is about -0.70, near the most extreme since mid-2022 record a week ago. 

Data: Mexico reports September trade balance, the unemployment rate, and Q3 GDP in the coming days. Despite the disruption from the United States, Mexico's trade balance has improved through the first eight months of the year. It recorded a $528 mln trade deficit through August after a nearly $13.5 bln shortfall in the Jan-August 2024 period and a $9.94 bln deficit in the same period in 2023. Exports have risen by about 4.7% this year and imports have increased by almost 2% year-over-year. Mexico's unemployment rate was at 2.43% at the end of 2024. Slightly below 3% in August, it is in the upper end of where it has been since August 2023. July 2023 was the last time it was above 3%. Mexico will provide its first estimate of Q3 GDP on Thursday, October 30. The median forecast in Bloomberg's monthly survey is for the economy to have stagnated in the quarter after growing by 0.64% in quarter-over-quarter in Q2 25 and 0.20 in Q1 25. The economy grew by 1.5% in 2024, and Banxico forecasts 0.6% growth this year before improving to 1.1% next year. 

Prices: The dollar traded at a two-week low ahead of the weekend, near MXN18.3430. It recovered and reached new session highs (~MXN18.4525) in late dealings ahead of the weekend.Still, it has gone practically nowhere as the convergence of the five- and 20-day moving average (MXN18.41-2) illustrates. A trendline drawn off the September and October lows begins the new week around MXN18.3050. The immediate risk to the peso is the Argentine election, and that might help explain is its weak close before the weekend.Indeed, the settlement was at the peso's lows in seven sessions.Argentina's 10-year dollar bond rallied ahead of the weekend, but the 17 bp decline, still left the yield almost 14 bp higher on the week. The Argentine peso declined by almost 2% last week. A poor showing by Milei's party can weigh on the Mexican peso, which maybe be sold as a proxy. However, we would not expect the sell-off to be sustained, and instead a pullback in MXN may offer a new buying opportunity for some participants. 

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