The Dollar and Gold Firm

Overview: The US dollar is firm to start the new week. The Japanese yen and Australian dollar are the heaviest with in the G10 (~0.30%). The euro and sterling are trading heavier but inside the pre-weekend range. The market anticipates the Bank of Canada to deliver a 50 bp rate cut in the middle of the week, and the Canadian dollar is threatening to extend its losses for the fourth consecutive week. China's prime lending rates were cut by 25 bp, slightly more than expected, and officials signal there is scope for further easing before year-end. All, but a few emerging market currencies weaker today. 

Outside of Japan and Hong Kong, the large equity markets in the Asia Pacific region were mostly firmer. Not so in Europe, where the Stoxx 600 is nursing a small loss after rising a little more than 1% over the past two sessions. US index futures are also softer. Bond markets are under pressure in Europe. Benchmark 10-year yields are up 4-5 bp. The US 10-year Treasury yield is nearly three basis points higher at 4.11%. Gold's run is extending into a fifth session today, the longest advance since a seven-day streak in March-April. December WTI is about 1.7% higher to near $70. It fell by nearly 8.25% last week, its largest fall drop in 4 1/2 years. 

Asia Pacific

With a light regional economic diary, the focus is on the whether Beijing will be announcing additional measures and the Japanese election on October 27. Chinese loan prime rates were cut by 25 bp today, the first cut since July, and a little more than expected. Still, given that other rates were cut in recent weeks, today's move seems like catching up rather than breaking new ground. The signal from officials is that further rate cuts will be considered before year-end and could include another cut in reserve requirements. Meanwhile, surveys by the local media warn that it is possible that Japan's LDP falls shy of the number of seats (233) to secure an outright majority in the lower chamber of the Diet. The last time that happened was in 2009. Still, the LDP is most likely to continue to govern with its coalition partner Komeito. Shortly after the election, the government is expected to announce a package of measures that cushion that the impact of inflation and support growth. The extra budget will likely be bigger than last year's (JPY13 trillion, ~$87 bln).

The dollar made a marginal new high against the yen (~JPY150.35) since early August last Thursday. The 10-year US Treasury yield rose to almost 4.12% ahead of the weekend, its highest level since early August, before turning down and settling lower. The greenback set session lows slightly below JPY149.40 before the weekend and fell to about JPY149.10 in the local session today before recovering slightly through JPY150 in the European morning. As the dollar traded around JPY150 last week, Japanese officials appeared to step-up their rhetoric about watching the market closely and reminding the market that "it is important for exchange rates to reflect fundamentals and move stably." The intraday momentum indicators are stretched, suggesting limited upside in the North American morning. Encouraged by rising Chinese equities and the firm local employment report last week, the Australian dollar traded firmly over the past two sessions. It initially saw a marginal extension to almost $0.6725 before reversing lower. It has been sold through the pre-weekend low (~$0.6695), for an outside day. The close is important from a technical perspective,  and a weak close warns that last week's low near $0.6660 is vulnerable. The US dollar's pullback ahead of the weekend, and especially against the yen, saw it unwind its gains against the offshore yuan. It has tested the upper end of the month-and-a-half range near CNH7.1250 before being sold to slightly below CNH7.11. The dollar slipped slightly below there today before recovering to almost CNH7.13. Last week's high was closer to CNH7.15. The PBOC set the dollar's reference rate at CNY7.0982 (CNY7.1274 Friday; last week's fixing range CNY7.0723 to CNY7.1274).

Europe

Europe's economic calendar is light this week and the main feature is preliminary PMI. There may be scope for a small uptick in the eurozone's results. Nevertheless, the swaps market has upgraded the chances of a 50 bp cut at the next ECB meeting on December 12. It is now near 30%. While the initial estimate of Q3 GDP (October 30) will draw attention, more import is preliminary estimate of October CPI due the following day. Outside of the PMI, the UK has a light diary in terms of market-moving reports. The next important event is the October 30 budget that has caused so much consternation. Meanwhile, the swaps market remains highly convinced that the Bank of England will cut the base rate a quarter-point at the November 7 meeting and about a 73% chance of another cut in December, up from around 45% a week ago and before the softer than expected CPI. 

The euro snapped a four-day drop before the weekend. It posted an inside day and remained below both the five- and 200-day moving averages, which have converged slightly above $1.0870. The area has capped it so far today, too. The euro has not settled above the five-day moving average (~$1.0860 today) so far this month. Options for 1.15 bln euro expire today at $1.0885. Sterling rose in back-to-back sessions to close last week. It was the first consecutive advance since a five-day rally ended September 24, but it is struggling today. It is softer but within the pre-weekend range. It was sold from $1.3060 to Asia Pacific to almost $1.3010 in the early European turnover. A two-month low was set last week near $1.2975. 

America

The US reports September index of Leading Economic Indicators today. So what? It is one of many indicators that has not been able to make sense of the post-Covid economy. The last month that the LEI rose was February 2022. The Atlanta Fed's GDP tracker was revised to 3.4% (from 3.2%) last week. The first official estimate is on October 30. Reports suggest that the US election is becoming a more important market factor. The closeness of the election polls at this late stage is seen as making Trump's reelection more likely, and the impact of his tariff proposals could be significant. Defecting further from the international trade regime that the US was instrumental in erecting is seen hurting the US closest trading partners the most (Canada and Mexico). The Bank of Canada meets Wednesday. The soft CPI (below 2) and the signal from Governor Macklem that, after three rate cuts, the pace could be accelerated, has emboldened the market to discount a little more than a 90% chance of a half-point cut.

The US dollar settled above CAD1.3800 before the weekend for the first time in two-and-a-half months. It remains bid today. With a 50 bp cut expected in the middle of the week, and the risk that officials leave the door open to another large cut, would seem to deny incentives to buy Canadian dollars. Last week's high was near CAD1.3840, and overcoming it, could target the CAD1.3900 area. The year's high was set in early August around CAD1.3945. The greenback was sold to a three-day low against the Mexican peso (~MXN19.6515) before reversing higher at the end of last week. It settled near session highs around MXN19.91 and has reached almost MXN19.98 today. Mexico is seen as a country that is particularly vulnerable to a second Trump term. Last week's high was near MXN20.0280. Last month's high was slightly below MXN20.15. And the year's high set early August was around MXN20.2180. Meanwhile, Brazil President Lula has canceled plans to attend the BRICS summit due to a head injury, but recall that at end of last week, Brazil imposed new duties on a wide range of products from China and other Asia counties (e.g., iron, steel, fiber optics). Most of the tariffs are for six months, while the Ministry of Foreign Trade investigates further. 

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