The dollar is firmer than most of the G10 currencies today, in the aftermath of the FOMC meeting. Fed Chair Warsh repeatedly noted that tightening of financial conditions since the September rate hike. Yet, while recognizing that the tightening does not mean tight, the Federal Reserve stood pat. The market does not believe the Fed, nor have the markets tightened sufficiently to bring inflation to the target, which it has exceeded for six years. Warsh seems to have implied a more gradualist approach to the rate adjustment, though the market continues to recognize a strong chance (~85%) of a hike in December. Without waiting for his task forces to report, Warsh announced there would be seven, rather than eight, live meetings in 2027 and six in 2028. The other meetings will be devoted to strategy.
Attention turns to the today’s ECB meeting and tomorrow’s BOJ meeting. Neither is expected to change policy, but the markets expected rate to be hiked in December. Meanwhile, the earnings news from the AI ecosystem has been mixed. The Philadelphia Stock Exchange Semiconductor Index (SOX) has risen for the past four sessions and settled at a two-week high yesterday. The rolling 30-day correlation between changes in the SOX and Dollar Index turned positive in recent days for the first time since late July.
Prices
G10
• The euro tested the year’s low, recorded om October 14, slightly below $1.1115, near the (50%) retracement of the rally that began last February, near $1.0140. The euro recovered and reached new session highs, nearly $1.1170, during Fed Chair Warsh’s press conference. However, there has been no follow-through buying and the euro returned to $1.1125 in the European morning before recovering to around $1.1145. A break of $1.11, where options for almost 1.4 bln euros expire today, could spur losses toward $1.10 initially, but the next retracement is a little below $1.09.
• The dollar snapped a three-day advance against the Japanese yen yesterday. It reached a five-day high, nearly JPY158.35 after the Fed’s decision. The month’s high was recorded on October 14, slightly below JPY159, but came off in late dealings to settle a few ticks lower. The dollar is consolidating quietly today, ahead of tomorrow’s BOJ meeting, in a roughly JPY157.60-JPY158.10 range. Options for about $910 mln at JPY157.90 expire today.
• The UK budget saw little foreign exchange or Gilt response. Sterling’s session low was recorded in late Asia-Pacific turnover, slightly below $1.3275. It recovered to almost $1.3340, new session highs during the Fed’s press conference. It is consolidating so far today, with a slightly heavier bias, inside yesterday’s range. A break of yesterday’s low could spur a move toward $1.3240 initially. There are options for GBP650 mln divided between two strikes ($1.3290 and $1.3300) that expire today.
• While the New Zealand dollar was punished yesterday for the disappointing decision by the central bank to stand pat, the Canadian dollar was not rewarded much for the Bank of Canada’s rate hike. Stil, it snapped a two-day decline. The US dollar posted an outside down day against the Canadian dollar. The US dollar reached almost CAD1.4070 yesterday before it ran out of steam, and after Warsh’s press conference, it was sold a new session low, slightly below CAD1.3990. Follow-through selling saw the greenback slip to CAD1.3970 before catching a bid and returning to the CAD1.40 area in Europe. Options for $1.1 bln at CAD1.3965 roll off today.
• The Australian dollar spent most of yesterday after $0.7025 and reached $0.7065 after Fed Chair Warsh’s press conference. It met the halfway mark of the decline since the early September high (~$0.7250). It reached almost $0.7070 today before sellers took in back to the $0.7030 area in European morning. A break of $0.7025, where options for A$725 mln expire today and another stack form A$1,1 bln expire today, would warn of the risk back to $0.6980-$0.7000, Yet we suspect it might be protected a little by the increased risk of a rater hike next week. In the futures market, the odds have risen to almost 85% from a little less than 65% at the end of last week. The New Zealand dollar is consolidating after yesterday’s shellacking. It has been confined to a narrow range around yesterday’s ~$0.5625 settlement, but it is struggling to sustain even modest upticks. Yesterday’s low was nearly $0.5585, and a retest cannot be ruled out.
EM
• The Mexican peso recovered from the session low in the North American morning to new session highs during the post-FOMC press conference. The greenback had briefly taken out Tuesday’s high and rose to a little above MXN18.71. It was subsequently sold to slightly below MXN18.60 to new session lows. The US dollar is at a three-day high in Europe as it approached MXN18.75. Monday’s high was slightly above MXN18.76, but the year’s high, recorded last week was closer to MXN18.86. The US dollar finished slightly lower against the Brazilian real, which continued to claw back some of the steep post-election losses.
• The dollar ground to a new low against the offshore yuan today, near CNH6.6565. The move is slow but persistent. The dollar has not risen against the offshore yuan since October 14. The PBOC set the dollar’s fix a little lower today (CNY6.7147 vs. CNY6.7165 yesterday).
• After closing firmly yesterday against the Indian rupee (~INR95.23), the dollar reached a new 2.5-week high today near INR95.3765. Reports suggest the central bank intervened in the onshore market. The dollar entered a gap created earlier this month and it extends toward almost INR95.5950.
Other Markets
• US equities finished firmly yesterday, ahead of Microsoft and Alphabet earnings. The Nasdaq Composite and S&P 500 rose by 0.25%-0.30%. Their news was split with the former exceeding expectations and the latter disappointed. Today Samsung disappointed. Japanese indices were boosted by favorable earning reports, while China, Hong Kong, South Korea and Taiwan fell. New pressure in Indonesia saw its index tagged for 3.5%. Europe’s Stoxx 600 is advancing for the fourth consecutive session. The Nasdaq 100 futures are off nearly 1%, and the S&P futures are trading about 0.2% lower.
• Benchmark 10-year yields are narrowly mixed today. The US 10-year yield, which had settled a little below 5% on Tuesday, closed near 5.02% yesterday. It is straddling the 5% level today. The two-year Treasury yield slipped about 3.5 bp to slightly above 4.70% and is near 4.68% now. European 10-year rates are mostly slightly firmer.
• Gold rallied late yesterday and recorded the session high (~$4082.50). It recovered from the session low (~$4025.20) seen after the FOMC statement. While gold settled firmer, silver did not. Still, it recovered from the session low (~$50.30) set after the FOMC statement. It recorded a new session high as the equity market closed (~$54.65). Yet, both precious metals are weaker today. Gold has been sold through yesterday’s low and did not find a bid until around $4016. For its part, silver is off nearly 2.5% to record new lows for the year, slightly below $52.50.
• December WTI drew near the contract high set before last weekend, around $103.90. It reached $103.55 yesterday and settled around the middle of the day’s range (~$101.30). The contract is trading quietly today between around $100.55 and $102.30.
Data
• Yesterday’s Federal Reserve meeting seems to minimize the importance of today’s US data for market participants, even if not for economists. Investors remain highly confident of a hike in December, but whatever drives the decision it most likely will not be today’s PCE deflator or the first estimate of Q3 GDP. Moreover, with CPI and PPI in hand, the PCE deflator rarely surprises. The headline rate is expected to tick up to 3.6% from 3.4%, while the core firms to 3.1% from 3.0%. And despite, weak consumer confidence reading, personal consumption expenditures are expected to have outstripped income (again) in September. The figures will be incorporated into the Q3 GDP estimate. The median in Bloomberg’s survey is for a 3.2% annualized pace after 2.2% in Q2. The Atlanta Fed’s GDP tracker sees 3.4%.
• The Bank of Canada hiked yesterday as the swaps market anticipated. The market has the next hike fully discounted for the end of January. Canada reports the results of the establishment employment survey for August, when the household survey showed a loss of 41.7k jobs (of which 35.9k were full-time positions).
• Due to the time change in Europe, the ECB’s decision will be announced at 9:15 am ET today. It is widely anticipated it will stand pat. The market is also keenly interested in President Lagarde’s career plan and succession at the central bank. The swaps market has a little more than an 80% chance of a hike in December.
• The UK reported September consumer credit and mortgage lending figures today. They tend not to capture the market’s imagination, though for the recorded, net consumer credit slowed as did mortgage lending. Chancellor of the Exchequer Healey’s budget presentation yesterday elicited a subdued market reaction. In fact, the Gilts appears to have the narrowest trading range yesterday than any budget presentation since 2020. A rate hike next week by the Bank of England has been heavily discounted (~95%) in the swaps market.
• Australia’s Q3 import and export price indices showed that the terms of trade improved after the mild deterioration in Q2. The export price index rose 1.4% after a 1.1% increase in Q2. The import price index fell 1.1% in Q3 after jumping 5.7% in Q2.
• Last week, Japanese investors sold foreign bonds. It was the sixth consecutive week and that matches the longest divestment streak since mid-2022. The Bank of Japan meets tomorrow. It is expected to hold after it hiked rates last month. There is a little more than an 80% chance of a hike in December discounted by the swaps market and two rate hikes are anticipated next year.
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