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Overview:  The greenback did not strengthen yesterday in Asian and European turnover despite the deteriorating conditions in the Middle East, but it did rally as North American participants entered the fray. Indeed, the Dollar Index rose from a marginal new four-day low to a marginally new four-day high. The safe haven bid seen in gold and oil was reflected in the foreign exchange market by the strength of the Swiss franc, the only G10 currency to appreciate against the US dollar, and the Japanese yen, which lost the least among the others. The dollar is mostly firmer today, though it is in a narrow range against the Japanese yen holding slightly below JPY150. The Australian and New Zealand dollars are leading the losses, following disappointing Australian jobs data and the broad risk-off mood. Among emerging market currencies, the South African rand and Mexican peso are the heaviest.

Equities and bonds remain under pressure. China and Hong Kong markets tumbled more than 2% while other large bourses in the region were off by more than 1%. Europe's Stoxx 600 is off for the third consecutive session and weakness in the US index futures suggests the same fate is in store for American markets. The BOJ upgraded its assessment of six of nine regions in its quarterly report released earlier today and yields on the 10-year JGB reached a new high near 0.83%. European benchmark yields are mostly 1-2 bp higher, though the 10-year Gilt yield has risen by five basis points. The 10-year US Treasury yield is risen another five basis points to near 4.97%. If sustained, this would be the fourth consecutive daily increase for a cumulative gain 35 bp this week. Geopolitical tensions override a stronger dollar and higher interest rates to underpin gold, which reached almost $1963 yesterday, just shy of a (61.8%) retracement of the losses since the high for the year was set in May near $2063. It is consolidating quietly so far today almost $5 on either side of $1950. December WTI is pulling back after stalling near $88.60 yesterday and it is traded near $85.60 in the European morning. Recall that last week it settled at $86.35 and was a little below $84 on October 6 before the Hamas attack.
 

Asia Pacific

Japan's exports rose last month on a year-over-year basis for the first time in three months. The 4.3% increase was led by auto, and medical supplies. The decline in imports that began in April moderated in September, generating a small surplus of about JPY62.5 bln. The deficit in September 2022 of JPY2.1 trillion. Through September, Japan's trade deficit was about JPY7.9 trillion compared with about a JPY14.3 trillion deficit in the first nine months of last year. Separately, the weekly Ministry of Finance portfolio flows showed foreign investors to re-invest in Japanese assets. They bought JPY1.26 bln of Japanese stocks and nearly JPY950 bln of Japanese bonds. Meanwhile, Japanese investors continued to buy foreign bonds (~JPY800 bln) and equities (~JPY180 bln).

Australia reported disappointing September jobs data. Overall job growth of 6.7k was about a third of expectations, and it lost nearly 40k full-time positions, the most since October 2021. Full-time position grew by an average of about 23k in the first eight months of the year and about 51k in the January-August 2022 period. In the last three months, the number of full-time jobs has fallen by about 53k. The drop in the participation rate to 66.7% from 67.0% helps explain the decline in the unemployment rate to 3.6% from 3.7%. Although the Australian dollar was sold on the news, the futures market showed a small increase in the odds of a hike at the November 7 central bank meeting to about 31% up from less than 25% yesterday and about 7% at the end of last week.

The dollar drew slightly closer to JPY150. To de-mystify the level, the market needs to move back and forth across it. The rise in long-term US rates, as the BOJ tried to slow the increase in JGBs yields by purchasing them in an unscheduled operation provides cover. The bar for intervention in the domestic bond market is lower than for the foreign exchange market. Pressure is not just building on the dollar-yen rate but also euro-yen. The convergence of the five- and 50-day moving averages slightly below JPY158 illustrates the effect of the ostensible dollar cap at JPY150. There are around $900 mln in options that expire there today and another $1.1 bln expire next Tuesday. Still, given the cat-and-mouse game, we look for a break of JPY150 outside of Tokyo hours. The selling pressure in North America yesterday saw the Australian dollar fall through Tuesday's lows after having seen follow-through buying in the local session yesterday. Although an outside day was recorded, the Aussie settled barely above Tuesday's low. Still, follow-through selling today saw the $0.6300 level frayed. Little stands in the way of a return to the year's low set earlier this month near $0.6285. Last October, it bottomed around $0.6170. The greenback crept higher against the Chinese yuan and is approaching CNY7.32. If sustained, this would be the fourth consecutive dollar advance, and since returning from the holiday last Monday, the yuan has risen in two of the nine sessions. The PBOC set the dollar's reference rate at CNY7.1795, the same as yesterday. The average in Bloomberg's survey was CNY7.3176, up from CNY7.3085 yesterday. Lastly, note that Indonesia hiked its seven-day reverse repo rate by 25 bp to 6.0%. Most had expected to it standpat as it has done since delivering the last hike in January. The rupiah fell by about 0.5%. 
 

Europe

On a seasonally adjusted basis, the eurozone's August trade surplus rose to almost 12 bln euros from 3.5 bln in July. Today, the current account surplus was reported, and it was 27.7 bln. In August 2022, a 34.9 bln current account deficit was reported, which was the largest shortfall since monetary union. The surplus peak this year was in June near 35.8 bln euros, which was the largest since February 2021.

Tomorrow, the UK will report retail sales volume, which is expected to have fallen by 0.4%. It would be the second monthly fall in Q3, the first time that has happened this year. Still, UK retail sales are holding up better than last year, rising slightly (~0.2%) this year through August after falling by an average of 2.1% a month in the first eight months of 2022. So far this week, the UK reported a small decline in average wage pressure and firmer than expected CPI. Still, the odds of a rate hike at the next BOE meeting on November 2 have eased to about 20% from slightly above 28% at the end of last week. Pricing in the swap market for the last meeting of the year in December is practically flat, implying a little less than a 50% chance of a hike. 

The euro was tagged for about half of a cent in the North American session, taking the single currency slightly through $1.0525. It has held the low today. Perhaps, the North American participants saw that neither Asia nor Europe were able to extend the euro's gains scored in North America on Tuesday despite the strong retail sales report. Today's high has been slightly below $1.0550 and it needs to resurface above $1.06 or remain vulnerable to a pull lower. A break of last Friday's low near $1.0495 re-targets the low for the year set on October 3, just below $1.0450. Sterling was turned back from forays above $1.2200 (where GBP1.6 bln in options expire today) and returned to the lower end of its recent range in the $1.2125-35 area. It settled poorly and follow-through selling has seen it slip to $1.2090. A convincing break signals a test on the October 4 low near $1.2035. Ahead of it, the lower Bollinger Band is near $1.2060.
 

America

Today's US data may be a bit anti-climactic after the retail sales, industrial production, and housing starts reported so far this week. The high-frequency data includes weekly jobless claims, the October Philadelphia Fed survey, existing home sales, and the index of leading economic indicators. The reports are not typically market movers. The takeaway from the recent string of data is that US economic activity was particularly robust in Q3. The Atlanta Fed's track is at 5.4% and many banks revised up their Q3 GDP forecasts as well. Still, ahead of Federal Reserve Chair Powell's talk at the NY Economic Club later today, the market has about a 6% chance of a November hike and a little more than a 40% chance of a hike before the end of the year (last meeting is December 13). A week ago, the implied odds were about 8% and around 32% respectively. 

Canada's industrial product and raw material price indices are not the stuff that typically move the exchange rate or interest rate expectations. Tomorrow's retail sales report (expected to fall by 0.1% after a 0.3% gain in July) is the last data point ahead of the Bank of Canada meeting on October 25. The softer-than-expected CPI readings reported on Tuesday dampened the odds of a hike from about a 38% chance at the end of last week to about a 15% chance now. The swap market has also downgraded the odds of a hike before the end of the year to about 37% from slightly more than 60% at the end of last week. Mexico also reports August retail sales tomorrow. They have risen on average 0.4% in the first seven months of the year, down from 0.7% average in the same period in 2022. 

The risk-off mood leaves the Canadian dollar vulnerable, and the US dollar settled above CAD1.37, which blocked the upside in recent days. It also corresponds with the (61.8%) retracement of the leg down since the seven-month highs seen earlier in October near CAD1.3785. Little seems to stand in the way of a re-challenge of the high. It has stalled in Asia and European turnover today around CAD1.3740. The greenback jumped from around MXN18.00 to nearly MXN18.31 in the North American morning yesterday and consolidated in the upper half of the range in the afternoon. The risk-off mood and the liquidity the peso offers contribute to the periodic bursts of selling pressure. Still, the peso was the worst-performing emerging market currency yesterday, falling about 1.25%. It reached almost MXN18.40 in the European morning. The high from earlier this month was a little below MXN18.49. A move above MXN18.50 could target the MXN18.75 area next. 

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