Japanese Verbal Intervention was More Effective than Bessent's, and the Dollar is Bid Ahead of FOMC Outcome

Overview:  The market is optimistic a deal will be struck between the US and China tomorrow. A reduction in the fentanyl tariff is expected, and a one-year delay in the broad export licensing requirement for rare earths and related technology has been tipped. Reports suggest China purchased two cargoes of US soy for the first time in months. But it is not clear what concessions the US made. Separately, the US appears to have finalized an agreement with South Korea. Ahead of the outcome of the FOMC meeting later today, the US dollar is firm. Among the G10 currencies, the noted exception in the Australian dollar, where firmer than expected inflation has seen rates raise across the curve and the market has downgraded the chances of a rate cut next week. Among emerging market currencies, all but a handful of East Asian currencies are weaker. Of note, the Philippine peso, which has been under pressure, fell to a new record low before recovering. Officials have downplayed talk of intervention. 

The Nikkei, China's CSI 300, and South Korea and Taiwan's main indices rallied more than 1% today. Europe's Stoxx 600 is little changed, while the US index futures are trading mostly firmer. European benchmark 10-year yields are narrowly mixed. The 10-year US Treasury yield is a little firmer but below 4.0%. Gold is firmer and has taken out the previous day's high for the first time since the record high was set on October 20. It settled the past two sessions below $4000 and is near $4030 in the European morning. December WTI extended its pullback to about $59.70 today, a four-day low to approach the 20-day moving average (`$59.60). 

USD: The Dollar Index recovered from the slippage through the 20-day moving average yesterday (98.65) and set the session high near 98.95 in North American dealings. It has been pushed marginally higher today after posting its lowest close in seven sessions yesterday. A band of resistance extends toward 99.20 area, while the trendline off the month's high set on October 9 (~99.55) is near 99.45 today. The outcome of the FOMC meeting is key. Despite the fifth consecutive increase in the year-over-year rate of CPI and the still-elevated core rate, the market understands that a quarter-point cut today is just about a foregone conclusion. While Miran is likely to dissent in favor of a 50 bp cut, as he did in September, comments by Governor Bowman, who is on the short-list to succeed Chair Powell, suggest she may also favor a larger move contrary to the overwhelming majority. There is some speculation of a dissent too in favor of a standpat policy, but we suspect it is more likely at the December meeting. Meanwhile, bank reserves have fallen below $3 trillion and the decision to wind down QT, which we thought was likely last month, could be announced today. The market's habit of reacting one way to the statement and another to Powell's press conference also makes trading around the FOMC meeting treacherous. 

EURO: The euro reached a six-day high yesterday, slightly shy of $1.1670 where sellers pushed it to new session lows in North America around $1.1625 and it is slipped below $1.1620 in Europe today. On the downside, a break could signal a re-test of last week's low slightly above $1.1575, which is also where the trendline connecting the July and October lows is found. The ECB meets tomorrow. Just as the market is convinced that the Fed will cut, it is nearly as sure that the ECB leaves policy unchanged. The ECB will also have Q3 GDP in hand. Growth is expected to have risen edged up by 0.1% in Q3, the same as Q2. Spain reported its Q3 GDP earlier today. It rose by 0.6% after 0.8% growth in Q2 and 0.6% in Q1. Meanwhile, despite the uninspiring economic activity, the unemployment rate continues to bounce along the 6.2%-6.3% trough. The September reading is due before the conclusion of the ECB meeting. The Netherlands vote today after the governing coalition broke down a few months ago when the far-right Party for Freedom Democracy left over asylum policy and later the centrist New Social Contract party pulled over a dispute related to sanctions against Israel. 

CNY: The market is closely watching the PBOC's steady campaign to allow gradual appreciation of the yuan. Still, the yuan's gains are modest. It has risen by about 2.8% year-to-date, and the offshore yuan has risen by about 3.40%. The dollar slipped slightly below yesterday’s CNH7.0915 low but is knocking around CNH7.10 in Europe. The low for the year was recorded the last time the Fed met (and cut interest rates) around CNH7.0850. Still, the settlement (~CNH7.0950) was the lowest for the year. The PBOC has pushed the dollar's reference rate to its lowest level in a little more than a year. It was set at CNY7.0843 today (CNY7.0856 yesterday). This in turn is thought to give more room for other currencies in the region to rise against the dollar, as well. Yet, the rolling 30- and 60-day correlations are extremely uneven and difficult to generalize. The correlation between the yuan and the South Koran won us the most robust at around 0.80 and 0.65 for the 30- and 60-days, respectively. Over the past 30 sessions, the Taiwanese dollar and the Malaysian ringgit's correlation is around 0.50. It is slightly below 0.45 for the Thai baht. It is a little above 0.30 for the yen and less than 0.20 for Indonesia's rupiah. The 60-day correlation of changes in the yuan is around 0.45 for the Thai baht, Malaysian ringgit, and Japanese yen. It is slightly below 0.35 for the Taiwanese dollar and below 0.15 for the rupiah. 

JPY: It is not clear that mild verbal intervention yesterday, the pullback in oil prices, or the US-Japanese agreement is sufficient to solidify the greenback's high against the yen in the JPY153.25 area. The pullback found support near JPY151.80, around the (38.2%) retracement of the last leg up and congestion from last week. US Treasury Secretary Bessent, who is part of an administration pressuring the Federal Reserve to cut rates despite the steady rising inflation in recent months, advised that the BOJ be given scope to adjust monetary policy in light of inflation, saw the dollar extend yesterday's losses to almost  JPY151.50 area. However, the impact did not last long, and the greenback rebounded to JPY152.55 by the end of the local session. The BOJ's decision is early tomorrow. Speculation of a rate hike has diminished, and now a hike would likely inject more volatility than standing pat. The BOJ will update its economic projections, but we do not expect anything significant. In July, the BOJ anticipated 0.6% GDP this year, 0.7% next and 1.0% in 2027. Core inflation was seen at 2.7% this year and falling to 1.8% next year before returning to 2.0% in 2027. Meanwhile, the rolling 30-day correlation between changes in the US 10-year yield and the exchange rate is near 0.55, the middle of this month's range and near three-month lows. It was near 0.80 as recently as mid-September. Ahead of the weekend, Tokyo reports October CPI. The headline is seen ticking down from 2.5% in September, but the core measures may tick up to 2.6% (from 2.5%). Separately, after a poor economic performance in August, September looks to have been better. Retail sales and industrial output likely recouped September's losses. The swaps market has less than a 50% chance of a hike in December discounted.

GBP: Sterling recorded a bearish outside down day yesterday. It traded on both sides of Monday's range and settled below its low. In fact, it posted its lowest settlement since the end of July (~$1.3275). Follow-through selling today extended the losses today and has frayed the $1.3200 area. It is trading below the 200-day moving average (~$1.3240) for the first time in more six months. The August (and May) lows are around $1.3140, which also corresponds to the (38.2%) retracement of this year's rally. Sterling fell to a new low for the year against the euro. It has fallen against the euro for four of the past five sessions and is lower today. The euro has risen above GBP0.8800 for the first time in two and a half years. The UK reported consumer credit. It slipped for the first time in four months in September and is typically not a market-mover.

CAD: The greenback was sold to about CAD1.3935 yesterday, its lowest level since October 9 and below the 200-day moving average (~CAD1.3955). It settled near its lows and follow-through selling today took it to around CAD1.3925. It has recovered to make new session highs near CAD1.3950 in Europe. The US dollar peaked on October 14 near CAD1.4080, a six-month high. With the pullback, the US dollar overshot the (61.8%) retracement of this month's gains and it has retraced (38.2%) of its gains since the Fed's rate cut last month. The next target may be around CAD1.3900. The swaps market is nearly as convinced that the Bank of Canada cuts today as it is about the Fed's cut. The Bank of Canada's decision is early (9:45 AM ET), while the Fed's decision will be announced at 2:00 pm ET. However, from here, the market expects divergence. After today's move, the swaps market has about 12 bp of easing discounted for Canada over the next 12 months and 75 bp by the Federal Reserve. Bank of Canada Governor Macklem has played down the elevated underlying core inflation readings and officials seem more concerned about sustaining growth. On Friday, StatsCan reports monthly GDP for August. It may have stagnated after growing 0.2% in July. The previous three months saw 0.1% contractions.

AUD: The Australian dollar took another leg higher yesterday. It reached a little above $0.6590, its best level since October 9. It overcame the (61.8%) retracement of this month's decline, which had stymied it on Monday. It was bolstered further today by larger than expected rise in Q3 CPI. It reached almost $0.6620 today but has since returned to straddle the $0.6600 area. The monthly calculation rose for the third consecutive month, and at 3.5% it is the highest since June 2024. The quarterly reading, which the central bank gives more weight to, rose 1.3% on the quarter for a 3.2% year-over-year pace, up from 2.1% in Q2. The underlying trimmed mean measure rose to 3.0% from 2.7% and the weighted median edged up to 2.8% from 2.7%. After RBA Governor Bullock spoke on Monday, the futures market downgraded the chances of a hike next week to about 10% from about 55% at the end of last week. After recovering yesterday, it fell to less than 6% today. 

MXN: The Mexican peso has gone nowhere quickly. With one exception, the dollar has been in MXN18.34-MXN18.50 trading range for the past two weeks. The greenback is trading between roughly MXN19.4225 and MXN18.4600 so far today. Mexico reports Q3 GDP tomorrow. The median forecast in Bloomberg's survey anticipates a 0.4% contraction after almost 0.65% quarterly growth in Q2 and 0.20% in Q1. Mexico's central bank projects 0.6% growth this year, which would be the weakest since the pandemic, followed by 1.1% next year. The economy grew by 1.5% last year. The central bank meets on November 6, and the market appears nearly split on the outcome. Meanwhile, the US dollar is near two-and-half week lows against the Brazilian real (~BRL5.35). Nearby support is seen in the BRL5.30-BRL5.32 area. Yesterday, the Argentina's dollar bond yield fell 25 bp and the peso weakened by almost 3% as the post-election euphoria was pared. There was some market speculation that the Argentine Treasury bought dollars. 

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