Forex
Asia FX dips, dollar near 6-mth peak before Fed, c.bank-heavy week
© Reuters.
Investing.com– Most Asian currencies fell on Monday, while the dollar steadied near six-month highs as markets hunkered down before several key central bank rate decisions this week, most notably the Federal Reserve.
Lingering concerns over China, particularly the country’s struggling property market, also kept broader sentiment subdued. Chinese police detained some employees of embattled developer China Evergrande Group (HK:), sparking concerns over renewed regulatory scrutiny towards the sector.
The fell 0.2%, shrugging off a stronger daily midpoint fix by the People’s Bank of China (PBOC). The PBOC is expected to keep its at record lows this Wednesday, as it struggles to meet a balance between supporting economic growth and stemming more yuan weakness.
The dollar retained most of its recent strength, staying within sight of a six-month peak hit last week as investors positioned for more signals from the Fed. The and fell less than 0.1% each in Asian trade.
Concerns over a U.S. government shutdown, amid disagreements over defence spending between major Republican lawmakers, also kept markets on edge.
Fed expected to pause, but rising inflation muddles rate outlook
The U.S. central bank is widely expected to hold interest rates at the on Wednesday.
But the Fed is widely expected to maintain its hawkish stance, as rising oil prices fueled a resurgence in inflation over the past two months. The trend could elicit at least one more hike from the bank this year, and is also expected to give the bank more impetus to keep .
“Inflation concerns linger and economic resilience suggest the Fed will continue to signal the potential for a final hike even if we don’t think it carry through with it,” analysts at ING wrote in a note.
Asian markets are likely to see continued pressure on the prospect of higher interest rates, with a rate cut only expected by mid-2024, before the Presidential elections.
While regional trading volumes were muted on account of a Japanese market holiday on Monday, some weak economic data also weighed on Asian sentiment. The fell slightly as data showed the country’s – a bellwether for Southeast Asian trade- fell more than expected in August.
The firmed slightly as Michele Bullock took over as governor of the Reserve Bank of Australia.
BOJ pivot in focus, yen near 10-month low
The moved little in holiday trade on Monday, but was trading just above its weakest level since November 2022.
Markets are largely focused on a this Friday, amid some signals from top officials that the bank was considering a pivot away from its negative rate regime.
Sticky inflation and increasing Japanese wages furthered this notion, with BOJ Governor Kazuo Ueda signaling that nearly a decade of negative interest rates had now provided sufficient levels of stimulus to the economy.
While any rate increases are likely to provide some support to the yen, the currency is still struggling amid declining carry trade interest and a widening gulf between local and U.S. interest rates.
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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