Forex
Dollar finds a footing after sharp drop but yen keeps rallying
By Harry Robertson
LONDON (Reuters) -The dollar bounced on Tuesday after falling to its lowest against the euro, sterling and Swiss franc since mid-March overnight as signs of a softening U.S. economy boosted the case for earlier Federal Reserve interest rate cuts.
Yet the yen powered 0.6% higher for a second day of solid gains as Bank of Japan officials warned they are keeping a close eye on the currency, and a report said the BOJ could soon discuss reducing bond purchases.
The euro was last down 0.4% at $1.0863 on Tuesday after rising as high as $1.0916 for the first time since March 21 in the Asian trading session. It climbed 0.5% as the dollar dropped on Monday.
As the U.S. currency found a footing, the was up 0.27% at 104.32, having fallen to its lowest since mid-April overnight at 103.99.
Data on Monday showed a second straight month of slowdown in manufacturing activity and an unexpected decline in construction spending, causing the dollar index to fall around 0.6%.
“Today’s US JOLTS job openings data could determine whether recent dollar losses are… the start of an important new trend,” said Chris Turner, global head of markets at lender ING.
The U.S. job openings and labour turnover survey (JOLTS) is due out at 1400 GMT, or 10 a.m. ET, and will show the number of vacancies in May. It will also report on the number of people voluntarily quitting their job.
Japan’s yen bucked the trend on Tuesday and continued to rise against the dollar after climbing on Monday, with the U.S. currency down 0.6% at 155.105, around its weakest in two weeks.
Bank of Japan Deputy Governor Ryozo Himino said on Tuesday the central bank must be “very vigilant” to the impact the yen’s fluctuations could have on inflation in guiding monetary policy.
Bloomberg reported that the BOJ will discuss slowing its bond purchases at its two-day policy meeting next week. That could push up yields in the coming weeks and may come before an interest-rate hike in July, something analysts at TD Securities said they now expect on Tuesday.
“We are inclined to see these stories as a test of the market’s reaction rather than anything more concrete, not least given the BOJ’s revealed preference for slow… adjustment,” said Nicholas Rees, FX market analyst at Monex Europe.
Sterling hit its highest since mid-March too at $1.2818 before falling to sit 0.43% lower.
Back in Europe, the dollar fell 0.2% to its lowest against the Swiss franc since mid-March at 0.8938 francs. Data showed Swiss inflation held steady at 1.4% year-on-year in May.
Investors were also keeping an eye on India’s rupee as election results come in, with the currency down on Tuesday amid a lack of clarity about the performance of the alliance led by Indian Prime Minister Narendra Modi.
A number of currencies that have been central to carry trades – whereby investors borrow in countries where interest rates are low and buy the bonds of those where rates are high – saw notable swings on Tuesday.
The high-yielding Mexican peso continued to fall as investors reacted to Claudia Sheinbaum’s landslide victory in Sunday’s presidential election. The low-yielding Japanese and Swiss currencies rallied, while high-yielding sterling dropped.
Also impacting currency markets was a drop in oil prices as investors worried about supply rising later in the year amid signs of weakening U.S. demand.
Australia’s dollar fell 0.8% while Norway’s crown dropped 0.9% in a sign of the currencies of commodity-producing countries coming under pressure.
Investing.com – The US dollar has gained more ground as the US presidential election draws near, UBS noted, with the market seeing rising odds of a win for Republican candidate Donald Trump.
A new USD-positive over the past week has been media reports of somewhat better outlook for Donald Trump in the latest polls, as outcomes that allow for policies such as more aggressive tariffs are viewed as more USD positive.
“Higher odds of a Trump presidency are likely to be associated with a stronger USD near term,” said analysts at UBS, in a note dated Oct. 16.
Where does this leave us now with our USD views?
Our expected ranges between Sep–Dec 2024 incorporated the possibility of a material USD rebound between now and year end, even if our year-end forecasts see a modestly lower USD from current levels.
Last week, with an eye to our year end forecast, we entered a long call reverse knockout, but we are not willing to implement a similar trade yet for and .
The spot is still far enough from our range extremes and high JPY implied volatility and negative carry make long JPY positions unattractive so close to US elections.
Turning to this week’s ECB meeting, the market is very confident that another 25bp rate cut will be delivered and we do not have a strong reason to disagree.
Market expectations are very muted for any form of surprise, and risk reversal skews bid again for EUR puts point to a market that is already primed for the risk of EUR softness.
With market pricing in line with our economists’ terminal rate expectations, we see EUR/USD as more exposed to US developments near-term, leaving us reluctant to fade recent softness on ECB reasons alone.
At 06:30 ET (10:30 GMT), EUR/USD rose 0.1% to 1.0894, USD/JPY gained 0.1% to 149.34 and AUD/USD fell 0.2% to 0.6685.
Investing.com – The European Central Bank holds its latest policy-setting meeting later this week, and Citigroup advises selling any rallies in the euro around this key event.
Markets are pricing in around 49 basis points of easing over the remaining two ECB meetings this year, which could limit dovish repricing around Thursday’s event, according to analysts at Citi, in a note dated Oct. 15.
“We see scope for a tactical bounce in EUR around this Thursday’s ECB meeting, which we like fading into November as US election risk premium materializes,” Citi said.
That said, “we like fading any subsequent rallies in EUR as we approach November and US election risk premium gets better priced.”
There is some evidence of this unfolding, the bank added, as EUR looks undervalued on its short-term fair value model and as Citi’s FX Positioning data suggests adding to EUR shorts.
“But our broader FX election basket still screens as undervalued relative to Trump betting markets, and we remain short EURUSD in both spot and options,” says Citi. “We would look to sell any retest of the 1.10 double top neckline — any break above there risks a move towards our adjusted stop of 1.1050, but if that resistance holds, we have higher conviction of a move towards our (and the double top) target of 1.08, with potential overshoot towards 1.07.”
At 05:25 ET (09:25 GMT), traded largely flat at 1.0892, almost 2% lower over the last month.
Investing.com – The U.S. dollar edged higher Wednesday, trading near two-month peaks on expectations of modest rate cuts from the Federal Reserve this year, while sterling slumped after benign inflation data.
At 04:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 103.180, remaining close to Monday’s two-month peak.
Dollar helped by trimmed rate cut expectations
Recent data indicating a resilient economy coupled with slightly hotter-than-expected inflation in September have led market participants to trim bets for an aggressive U.S. rate reduction.
Adding to these expectations were comments from Atlanta Federal Reserve President on Tuesday, who said he had penciled in just one more interest rate reduction of 25 basis points this year when he updated his projections for last month’s U.S. central bank meeting.
Most market participants see two more cuts this year, totaling 50 bps, and traders currently lay 92% odds for a 25-basis-point cut when the Fed next decides policy on Nov. 7, with an 8% probability of no change, according to CME Group’s (NASDAQ:) FedWatch Tool.
Sterling slumps after inflation release
In Europe, slumped 0.5% to 1.3003, after data showed British inflation fell more than expected in September, paving the way for a rate cut next month.
The UK’s fell to 1.7% on an annual basis, below the forecast 1.9% and the 2.2% recorded a month earlier.
This was the first time it had fallen below the Bank of England’s 2% target since April 2021, and added to data seen earlier in the week that showed British pay grew at its slowest pace in more than two years.
“The data is unequivocally dovish for the Bank of England and paves the way for rate cuts at the two remaining meetings this year (November and December),” said analysts at ING, in a note.
“Given the comments by Governor Andrew Bailey earlier this month suggesting the BoE could increase the pace of easing, markets may be tempted to price in some chance of a 50bp rate cut in November.”
traded 0.1% lower to 1.0882, ahead of Thursday’s policy-setting meeting by the European Central Bank.
The has already lowered rates twice this year and a cut to the 3.5% deposit rate this week is almost fully priced in by financial markets.
“EUR/USD is predominantly driven by external factors. The substantial drop in oil prices has narrowed the scope for a further drop based on market factors, but we continue to suspect that pre-US election positioning should favor a weaker EUR/USD,” said ING.
Yuan nurses weekly losses
fell slightly to 7.1179, with the yuan nursing losses this week as sentiment soured over the country’s plans for more stimulus.
China’s Ministry of Finance said it will enact a slew of fiscal measures to boost growth, but did not specify the timing or size of the planned measures, spurring uncertainty over its effectiveness.
rose 0.2% to 149.43, with the pair climbing closer to the 150 resistance level.
data due later this week is expected to offer more cues on the Bank of Japan’s plans to hike rates further.
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