USD making a comeback, JPY weakens further & November will be busy!
The USD has pulled back recent losses as the market trims expectations of the speed of US rate cuts. The Japanese election result is important for the global economy – the governing LDP party was always going to struggle to win support after recent scandals, but the loss of its majority in the lower house means the world’s 4th largest economy will almost definitely go through weeks if not months of political deadlock amidst rising regional tensions and the election of a new US President.
GBP: GBP continues to trade with a strong bias and is performing well against a strong USD - GBP/USD above 1.2950 and GBP/EUR holding above 1.1950. The Labour party will deliver it’s first budget this week – an unusually long time after taking office. With mixed signals regarding the re-jigging of debt rules and the exact nature of funding, currency markets will be watching the budget very closely.
At the IMF meeting last week, Governor Bailey spoke in dovish terms, suggesting 2 rate cuts of 0.25% in November and December. This expectation will make it hard for new investors to come and buy GBP.
USA: At the moment, markets are pricing in a 97.7% chance that the Fed cuts rates by 0.25% in November, but will proceed slowly with further cuts (possibly one more 0.25% cut in December). This has helped the USD pull back the losses of the previous 3months – EUR/USD traded at 1.1200 through September, now stands at 1.0820.
As polls start to show Trump pulling ahead in what is a tight election race, this is helping US yields to rise along with the $$. Plenty of data ahead this week, with Inflation (PCE), 3rd quarter GDP announced alongside house-price data. The most important release will be Friday’s employment data – the previous month’s strong print sent the USD rallying strongly.
EURO: The EURO remains lacklustre - GBP/EUR at 1.1950, but due to recent USD weakness we have EUR/USD holding up at 1.0850 levels.
Key data this week, with inflation being released on Wednesday – if inflation has picked up as the market expects, this could give the EURO a helping hand.
CAD: A weak performer, despite rising oil prices – upon which Canada is heavily reliant, as it is the largest exporter of oil to the USA. Poor Retail Sales on Friday (0.4% rise vs 0.5% expected) and a rate cut of 0.25% earlier in the week are all weighing on the currency. USD/CAD has moved from 0.7450 to 0.7200 since the end of September.
China: The slowing of demand from China is having a very real effect on international businesses – Apple and Philips are just 2 big names lowering profit estimates due to weakening Chinese demand. Adding to the recent slew of weak data, China this morning reported a plunge (-27.1% in Sep following a -17.8% decline in August) in manufacturing profits. Although the National People’s Congress is expected to announce a raft of measures to bolster growth next month, the ripple effect is clearly taking it’s toll on international economic growth.