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Last week will be recalled as the end of the longest government shutdown in US history. Despite the poor optics and disruptions for many, the lasting impact is likely to be marginal though the shutdown may weigh on Q4 economic activity. Nevertheless, perhaps swayed the comments of most of the 14 Fed officials that spoke in recent days, the derivatives market has downgraded the chance of a Fed cut next month to a little mor than 40% from around 66%. Meanwhile, the market feels more confident that the Bank of England will cut rates when it meets on December 18 after a string of disappointing data. On the other hand, after a better-than-expected employment report, the market feels more confident that the Reserve Bank of Australia's easing cycle is over. Turning to Japan, the swaps market has reduced the odds of BOJ rate hike next month for six consecutive sessions. Indicative pricing is consistent with about 1-in-3 chances of a hike, down from almost a 50/50 proposition a week ago. 

With the US government re-opening, economic reports will likely resume shortly. The September employment data will be reported on November 20. There may be headline risk, but ADP already reported a loss of about 29k private sector jobs. Through August, the BLS estimated an average monthly gain of 74k private sector jobs, while the ADP's estimate was 73k. You cannot get much closer than that. While sterling was virtually flat last week despite disappointing employment and growth data, Gilts were hammered by the reported shift in the government's fiscal strategy that will allow inflation to push households into higher tax brackets. The nearly 14 bp jump ahead of the weekend was the most in four months. The weakness of the yen and a soft auction reception saw the 10-year JGB yield rise for the fourth consecutive week, and at 1.71%, it is at a new high since 2008. China's disappointing data did not prevent the PBOC from setting the dollar's reference rate at a new low for the year before the weekend. A policy response does not seem imminent. 

US

Drivers: The Dollar Index fell to about 96.20, its lowest level since February 2022 on September 17 when the Fed cut rates for the first time this year. It trended higher to 100.35 in early November. The short-covering rally appears to have run its course. It stalled at the 200-day moving average on November 5, near 100.35, and fell to 99.00 last week. The rolling 30-day correlation of changes in the DXY and US two- and 10-year yields has slackened, and both are less than 0.45. The 30-day correlation with changes in the S&P 500 was inverse from late June through the first part of October. Now, it is near 0.30, the highest in five months. As one may intuit, the Dollar Index is inversely correlated with gold. It reached -0.82 in May, the most since the end of 2022, but is now near -0.15. 

Data: Despite the continued government shutdown, there are a bevy of reports that will give some insight into the state of the economy as it enters the last half of Q4. The Empire and Philadelphia Fed surveys draw the most attention. There is a general sense that economic growth has weakened, and potentially sharply, with the disruption emanating from government closure an important drag. The minutes from last month's FOMC meeting may reinforce the recognition of the wide dispersion of official views. The September employment report will be reported on November 21. After more than 3/4 of Fed officials spoke, odds of December cut have been trimmed to around 40% from around 2/3 a week ago. Meanwhile, collect data for initial weekly jobless claims, and many economists and analytic services are aggregating the data, and the ADP will provide a weekly estimate of private sector employment. Existing home sales will be reported, and there is some talk that we are experiencing the first sustained rise in price of the average existing house above the average new house price. 

Prices: The Dollar Index found support near 99.00 in the last two sessions. The (38.2%) retracement of the rally since the multi-year low was recorded on September 17 (~96.20) is found a little below 98.80 and the (50%) retracement is around 98.30. The five-day moving average slipped below the 20-day moving average ahead of the weekend for the first time since late September. The daily momentum indicators are falling. Initial resistance in the 99.50-60 area. 

EMU

Drivers: The euro has become less sensitive to changes in the two-year US yield. The 30-day inverse correlation reached almost -0.80 in early September, the most since late 2016. It is now near -0.40, which is back to levels not seen since in July. The 30-day correlation of changes in Germany's two-year yield and the euro was positively correlated from last November through early May this year but has been inverted since then. The inverse correlation reached -0.53 at the start of October but is now around -0.10. The euro is inversely correlated with changes in the US-German two-year differential. It was around -0.80 at the end of last year, the most extreme since the end of 2015. It slackened to less than -0.10 in early June before returning to -0.77 three months later. It is now hovering around -0.40-0.45. 

Data: There are two reports of note from the eurozone in the week ahead. First is the preliminary November PMI. The manufacturing PMI rose every month this year but September and reached the 50 boom/bust level in October, it best reading since Russia's invasion of Ukraine in 2022. The composite PMI has risen for the past five months and was at a two-year high in October of 52.5. Negotiated wages for Q3 are due at the end of the week. The moderation are wages is unlikely sufficient at this juncture to bring another rate cut back on the table. The market has about a 1-in-5 chance of a hike through the end of Q1 26. 

Prices: The euro reached the high for the month near $1.1655 Thursday and held barely below it ahead of the weekend. It met the (38.2%) retracement of the decline since the multi-year high was recorded on September 17 (~$1.1920). The (50%) retracement is slightly below $1.1700. The five-day moving average crossed above the 20-day moving average for the first time since late September. The daily momentum indicators are trending higher. A break of support in the $1.1585-$1.1600 area would disappoint. 

PRC

Drivers: The 30-day correlation of changes in the dollar against the offshore yuan and the Dollar Index peaked this year in early August near 0.80. It has been trending lower but has steadied in recent days in the 0.30-0.35 area. The dollar's change against the offshore yuan and gold is mostly inversely correlated. The rolling 30-day correlation was positive for most of February but by April it had fallen to nearly -0.70. It remained inversely correlated until late October and now is slightly positively correlated (<0.10). 

Data: China reports year-to-date foreign direct investment. Foreign direct investment is not only greenfield investment or acquisition. It also includes retained earnings. The location of retained earnings could be a function of ease of movement and/or interest rate considerations. Separately, the one- and five-year loan prime rates will likely remain unchanged at 3.0% and 3.5%, respectively. It has been briefly inversely correlated in early June. 

Prices: The dollar's low for the year against the offshore yuan was recorded on September 17 near CNH7.0850. The October low was seen the next time the Fed cut rates toward the end of the month around CNH7.0885. The November low, so far, was set before the weekend near CNH7.09. The disappointing October data, reported on Friday, failed to have much impact as the greenback finished little changed on the day. For its part, the PBOC has continued to lower the dollar's reference rate on a trend basis, and before the weekend, it was fixed at CNY7.0825, the lowest since October 2024. 

Japan

Drivers:  The dollar's movement against the Japanese yen is highly correlated with the dollar's broader movement reflected in the Dollar Index. The 30-day rolling correlation is around 0.70. It has remained above 0.70 since early April and was above 0.90 from early May through mid-June. The correlation between changes in the exchange rate and the 10-year US yield is around 0.50. It had briefly been above 0.80 in early August. The low for the year was in May, when it slipped below 0.10. The correlation of the exchange rate and Japan's 10-year yield is weaker (~0.15) and has been more volatile (range of ~-0.35 and +0.35 this year). 

Data: Japan will report its first estimate of Q3 GDP early Monday. After expanding at an annualized rate of 2.2% in Q2, the world's third largest economy may have contracted by 2.5% in Q3, according to the median forecast in Bloomberg's survey. Consumer spending, capex, and net exports were the likely drags. Japan is expected to be returning to growth this quarter. Japan reports October trade figures in the middle of the week. Despite the tired narrative of Japan's export prowess, and the deeply under-valued yen om most metrics, Japan records a trade deficit. The average monthly shortfall this year is about JPY315 bln. The deficit in the first nine months of 2024 averaged around JPY557 bln and JPY893 in the same period in 2023. Indeed, exports rose in September for the first time in five months, boosted by semiconductor chips and electronics. Exports to the US were down 13.3% year-over-year. Interestingly, the value of auto exports to the US fell 24.2%, while the number of vehicles fell by 14.1%, suggesting Japanese automakers absorbed the tariffs in narrower margins ostensibly to preserve market share. Exports to the eurozone rose 5% and shipments to China increased by 5.8%. Before next weekend, Japan reports October CPI, but the Tokyo figures out late last month suggest the headline and core measures will rise for the second consecutive month and will stand back above 3% for the first time since July. At the end of the week, Japan will see the preliminary November PMI. There is little sign in the composite, which averaged 51.6 in Q3, its best quarterly average in a year that the economy contracted. The PMI is typically not a market-mover in the local market. 

Prices: The dollar poked briefly above JPY155 last week for the first time in nine months. Comments by the Minister of Finance, using code word ("urgently watching) that have often signaled heightened risk of material intervention. The broader pullback in the US dollar helped steady the exchange rate. Material intervention does not appear likely. The dollar pulled back to almost JPY153.60 before the weekend, a four-day low. but it recovered and settled above JPY154.00. The momentum indicators did not confirm the new high, but the potential bearish divergence has failed to have much impact. A break of JPY152.80 is needed to signal a high is in place; otherwise, a move above JPY155 could target the high for the year, recorded on January 10 near JPY158.85. In the swaps market, the odds of a BOJ hike next month have slipped to about 32% from nearly 50% a week ago. 

UK 

Drivers: Sterling's sensitivity to the broad dollar movement has slackened recently. The rolling 30-day inverse correlation of changes in sterling and the Dollar Index reached -0.92 in late September, the most extreme since April 2024. It is now near -0.75, and back to mid-August levels. The correlation with the euro also has slackened from almost 0.88 in late September to around 0.75 now. This year's range has been between almost 0.93 in early June to about 0.65 in late July. The 30-day inverse correlation between sterling and changes in the two-year US yield reached a 10-year extreme shortly after the Fed cut rates in September around -0.70. It is now almost -0.20, and back to April levels. The 30-day inverse correlation with changes of the two-year Gilt yield reached a three-year extreme near -0.60 in early October. It is now near -0.05. Sterling is more sensitive to the changes in the 10-year Gilt yield, but it too has weakened. The inverse correlation was around -0.70 in early October and is near -0.20. 

Data: This week's high frequency data will likely impact expectations for the Bank of England meeting next month. Ahead of it, the swaps market is discounting a little more than a 70% chance of a cut. It has another cut nearly fully discounted toward the end of Q2 26. The swaps market sees a terminal rate near 3.50% (currently 4%). In the middle of the week, October CPI will be released. Through the first three quarters, UK inflation rose at an annualized rate of 3.6% compared with 2.4% in the same period last year. This overstates the case due to the administered price hikes in April. UK's CPI rose an annualized pace of about 1.2% in Q3. Core and service prices remain elevated. They rose 4.7% and 4.1% respectively in September year-over-year. Expectations for monetary policy may also be sensitive to retail sales that will be reported at the end of the week, a few hours before the preliminary PMI. UK retail sales rose 0.5% in September. This was about the average in Q3, which was the second best quarter since Q1 24. The October composite PMI was 52.2, its second highest reading of the year (August was the best at 53.5). The Autumn budget (November 26) looms large and public finances that will be reported at the end of the week help set the stage. The latest report suggests that the government will seek to raise revenue through bracket creep as higher nominal incomes force many into higher tax brackets and it may introduce new narrow taxes, such as on gambling and the sales of expensive property. 

Prices: Despite disappointing data, sterling proved resilient. It recorded a new high for the month, slightly above $1.3200 on Thursday. It remained within Thursday's range ahead of the weekend. The 20-day moving average is near $1.3200, and sterling has not settled above it in about a month. The daily momentum indicators are moving higher. Still, a break below last week's low (~$1.3085) would weaken the technical tone. 

Canada 

Drivers: The 30-day correlation between the US dollar against the Canadian dollar and Dollar Index peaked this year around 0.80 in late August and it has been subsequently more than halved and is now the lowest since February. The 30-day inverse correlation between changes in the exchange rate and changes in the S&P 500 reached the most extreme of the year at the end of September near -0.60. It was around zero in late October and is now almost -0.20. The 30-day correlation between changes in the exchange rate and WTI is also hovering around zero. For the first time since May, the 30-day correlation of changes in the US two-year yield and the exchange rate is slipping into inversion (~-0.07). In March, the inversion of almost -0.60 was the most extreme in five years. 

Data:  With the overnight lending rate at 2.25% and the guidance from the Bank of Canada, pricing in the swaps market suggests this is the terminal rate. That said, the swaps are pricing in around a 45% chance of a cut near the middle of next year. This week's data, which includes CPI and retail sales, are unlikely to sway the market. Through September, Canada's headline CPI has risen at an annualized pace of 3.6% (2.4% annual pace in January-September 2024). The Bank of Canada puts more emphasis on the underlying core rates, which are a little above 3% but officials suggest the underlying rates are closer to 2.5%. Canadian retail sales tend to be volatile on a monthly basis, but through August rose by an average of about 0.1% a month, the same as in the first eight months of last year. After rising by 1.0% in August, Canadian retail sales may have slowed in September. Canada also reported September portfolio flows. The three months through August saw a net inflow of C$53.6 bln, the strongest three months since last September-November. However, in the year through August, net portfolio investment inflows have totaled about C$30.2 bln compared with C$112.5 bln in the first eight months of 2024. 

Prices: The US dollar peaked earlier this month around CAD1.4140, a little shy of the retracement target closer to CAD1.4165. Last week's pullback stalled near CAD1.3985. The greenback posted a bullish outside day on Thursday but follow-through buying ahead of the weekend was limited to CAD1.4045, the (38.2%) retracement of the retreat. Nearby resistance is seen in the CAD1.4060-80, while a break of CAD1.3980 could spur a move toward CAD1.3935 initially. 

Australia 

Drivers: The 30-day correlation between the Australian dollar and the Dollar Index has moved from around -0.80 in early October to its first positive correlation since early 2020. Meanwhile, the inverse correlation with changes with the two-year US yields has shifted from around -0.60 in early September to almost 0.55 now. As one may intuit, the Australian dollar's is typically correlated with changes in Australian rate expectations, reflected by changes in the two-year yield. That was the case this year until late September. The rolling 30-day correlation shifted to inversion, and approached -0.25 in the middle of October, the most in two-and-a-half years but is now near zero. 

Data:  Australia's economic calendar in the week ahead features the minutes from the recent central bank meeting, Q3 wage price index, and the preliminary November PMI. The futures market sees the Reserve Bank of Australia on hold through Q1 26 and slightly more than a 50% chance of a cut toward the end of Q2 26. This week's reports are unlikely to have significant impact on expectations. Wages rose 3.4% year-over-year in Q2. The composite PMI has slowed in the past two months. It was at 52.1 in August compared with 51.7 in August 2024 and 50.2 at end of last year. 

Prices: The Australian dollar rallied from the November 5 low near $0.6460 to a high on November 13 around $0.6580. It pulled back ahead of the weekend and met the (61.8%) retracement of the rally near $0.6500 before rebounding impressively back to $0.6550. The momentum indicators are constructive. The trendline connecting September and October highs comes in near $0.6580 at the start of the new week.

Mexico

Drivers: The peso also appears to have become less sensitive to the dollar's broad direction reflected in the Dollar Index. The rolling 30-day correlation of changes in the exchange and DXY reached a 20-year high a little above 0.80 in late September and eased to a six-month low below 0.10. It was inverted in most of February and into early March. At the same time, the inverse correlation with S&P 500 changes remains near a three-year trough around -0.65. Changes in the dollar against the Mexican peso and the JP Morgan Emerging Market Currency Index are inversely correlated, almost -0.80. The 30-day inversely correlated has been between -0.60 and -0.85 for the past five months. 

Data: Mexico's data in the coming days will likely have limited impact. Minutes from the recent central bank meeting, where a 25 bp cut was delivered, are not often very revealing. The market suspect there is scope for another quarter-point cut in the cycle to bring the overnight rate to 7.0%. Another look at Q3 GDP, which contracted by 0.3% quarter-over-quarter, and shrank by 0.2% year-over-year. The report makes the IGAE economic activity report less interesting. It serves the function of a monthly GDP reading, and of note, it was -0.90% year-over-year in August. 

Prices: The dollar recorded a two-month high on November 5 near MXN18.77 before reversing lower. It fell for six consecutive sessions until it ticked up on November 13 after falling to MXN18. 2530.. The sharp initial losses of equities before the weekend helped lift the dollar to MXN18.4040, a four-day high. As US equities recovered, the greenback was sold back to almost MXN18.30. The low for the year was recorded on September 17 near MXN18.20. The momentum indicators are getting stretched but might not prevent a re-test on the low. 

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