Photo by Austin Distel on Unsplash
 

Overview: The US dollar is mostly consolidating in narrow ranges against the major currencies. The notable exception is the Japanese yen, which has slumped to a new nine-month low as the greenback approached JPY155. Despite repeated warnings by Japan's finance minister, the market seems undaunted. Actual material intervention seems unlikely, especially outside of Tokyo markets. Bearish sentiment toward sterling after yesterday's poor employment data has seen it edge a little closer to $1.3100, where options for GBP1.9 ln expire today. Most emerging market currencies also are softer, though the PBOC set the dollar's reference rate at a new low since last October. 

Equities are in rally mode today. The large markets in the Asia Pacific region rallied but China and Australia. Europe's Stoxx 600 is advancing for the third consecutive session and is up more than 3% this week. US index futures are higher, and the spot indices may gap higher at the open. The US Treasury market, which was closed yesterday, is bid today, with the 10-year yield off three basis points, ahead of today's auction, to around 4.08% now, which it has not closed below this month. European yields are mostly a little firmer. The 10-year Gilt is an exception, with a nearly three basis point increase to about 4.42%. Gold is consolidating after stalling in front of $4150 yesterday. A brief dip below $4100 was bought today. December WTI rose more than 2% Monday-Tuesday but is giving about half of it back today and is near $60.50. 

USD: The Dollar Index is frayed the trendline connecting the multi-year low on September 17 (~96.20) and the October lows (~98.00 and ~98.55) yesterday. It is near 99.45 today. DXY has a five-day slump in tow, which followed a five-day advance. The daily momentum indicators have turned lower. Still, it is consolidating between about 99.45 and 99.65 today. Initial resistance is seen near yesterday's high 99.75, On the downside, a break of the 99.20 area may target the 98.75 area, which holds the (38.2%) retracement of the rally since the September low. Nearly a third of Federal Reserve officials speak today and three more tomorrow. The futures market is discounting almost a 67% chance of a cut next month; little changed since the FOMC meeting. Meanwhile, after Monday's strong reception to the $58 bln three-year note sale, Treasury is selling $42 bln 10-year notes today. The yield is nearly flat from the last auction (~4.11%). The longest government shutdown seems set to end today or tomorrow. Separately, yesterday the ADP estimated private sector jobs declined 11,250 on average in the four weeks through October 25. ADP private sector jobs estimate has done a fairly good job of tracking the BLS estimate. In the three months through August, BLS estimated average private sector job growth of 29k, and ADP estimate was 26k. The first eight months of the year, BLS estimated private sector added an average of 74k jobs a month, while ADP's estimate was 73k on average. 

EURO: The down trendline off the September 17 multi-year high near $1.1920 and the two highs in the second half of October that came in around $1.1590 was violated yesterday as the euro reached about $1.1605, though closed below it. It is consolidating in a narrow range of roughly $1.1565-$1.1585 so far today. A convincing move above $1.1600 targets $1.1630-40 initially and then the $1.1665 area. The eurozone will report September industrial production tomorrow. Germany, France, and Spain reported gains (1.3%, 0.8%, and 0.4%, respectively) after contractions in August. Italy will report ahead of the aggregate figures. The median forecast in Bloomberg's survey is for a 0.7% increase in industrial output, which averaged 0.1% a month in the first eight months of the year, compared with a 0.2% average monthly decline in January-August 2024 and -0.3% a month in the comparable 2023 period. Still, with Q3 GDP already in hand and set to be review at the end of the week, the September figures will likely have negligible impact. 

CNY: The broad dollar setback yesterday saw it fall to a new six-day low against the offshore yuan near CNH7.1175, which has held today. The next area of support is seen around CNH7.1135. The heavier dollar tone may have encouraged the PBOC to shave the dollar's fix today after it was edged a little higher in the past two sessions. The reference rate was set at CNY7.0833 today (CNY7.0866, yesterday), which is a new low since October 2024. China reportedly is working on a new system that will allow it to expedite rare earth export licenses, but there still seems to a divergence of understanding with the US. Washington seemed to understand that the earlier export restrictions from April would be lifted, but Beijing's statements do not appear to reflect this. Moreover, Beijing still seems determined to restrict military and dual purpose uses for the rare earth magnets. 

JPY: The dollar has been bid to JPY154.90 today after bumping against the JPY154.50 cap since the end of last month. It drew ever so close to JPY154.50 yesterday after the soft US ADP estimate. The dollar is higher for the fourth consecutive session against the yen, and this helped spur verbal intervention by Finance Minister Katayama. He again used the core words of watching "with a high sense of urgency" that in the past signaled that material intervention was near. Yet, in the current environment, shaped in part by the reluctance of the BOJ to hike rates, a new government that seemed encourage this, and mercurial US administration that could undermine actual intervention by criticizing it, seems unlikely. And it makes intervention outside of Tokyo hours more challenging. It seems as if this tug-of-war with the market is overwhelming the softer US yields influence on the exchange rate now. Meanwhile, the government's economic package is taking shape and could be formally presented by the end of next week. It will seek to abolish the provision tax on gas and provide new subsidies for electricity and gas, expand the basic tax deduction, boost defense spending, and focus on other strategic sectors. The package is expected to be in excess of last year's JPY13.9 trillion (~$92 bln). 

GBP: Sterling fully recovered from yesterday’s drop following the disappointing employment report. It fell to almost $1.3115 and recovered to almost $1.3185, a new session high before the end of the European session. However, selling pressure returned today and sterling is slipping through yesterday's low. A band of chart support is seen between $1.3080-$1.3100. There is a large option for almost GBP1.9 bln at $1.3100 that expires today. Tomorrow, the UK reports Q3 GDP. The British economy is expected to have expanded by 0.2% after 0.3% growth in Q2. Improvement is expected in consumption total business investment, while government spending may have slowed and trade may have been a larger drag. If there is a surprise, it is more likely on the downside. Assuming a flat September, which is what the median forecast in Bloomberg's survey projects, the monthly GDP for Q3 would also be flat. The pendulum of market sentiment has edged a little more toward a rate cut next month. The day before last week's Bank of England meeting, the swaps market had about almost a 65% chance of a cut in next month's meeting discounted. Now, indicative pricing is consistent with about 72% chance. 

CAD: The dollar has tested the CAD1.4000 level each day this week, and so far, it is holding. The CAD1.4015 area corresponds to the (50%) retracement of the greenback's rally since both central banks cut rates in late October. The (61.8%) retracement is near CAD1.3985. Resistance is seen in the CAD1.4045 area. Canadian building permits have fallen for three months through August and have fallen in six of the first eight months of the year. The median forecast in Bloomberg's survey is for a 1.0% gain in September, which will be reported today. 

AUD: After rising by about 0.65% on Monday, matching the largest single day advance in nearly two months, the Australian dollar consolidated in a narrow range yesterday. It held $0.6515 but could not surmount $0.6540. After holding yesterday's lows today, the Aussie reached almost $0.6545, a seven-day high before consolidating. There are options for about A$940 mln at $0.6530 and another stack for A$1.4 bln at $0.6500 that expire today. Tomorrow, Australia reports October jobs data and Melbourne Institute releases the results of its consumer inflation survey. The unemployment rate is seen slipping to 4.4% from 4.5% while inflation expectations will likely remain elevated (4.8% in October). The futures market is discounting almost a 20% chance of a cut next month, which subjectively seems high. 

MXN: Mexico's disappointing September industrial output (-0.4% vs. median forecast in Bloomberg's survey for a flat report after a 0.3% decline in August), which was the fourth consecutive decline, had little impact on the peso. Third quarter GDP has already been released and the central bank cut rates last week. Moreover, the broadly weaker dollar carried the day. It fell to nearly MXN18.3050 yesterday, and follow-through selling today pushed to about MXN18.2865. The low for the year, recorded on September 17, was near MXN18.20. Brazil's October CPI came in a little softer than expected (4.68% year-over-year, down from 5.17% in September) and stands at a nine-month low. It was not sufficient to spur speculation of a rate cut next month. The dollar fell to a new low for the year near BRL5.2640. There is little on the charts until the BRL5.16-BRL5.20 area. 

More By This Author: