Forex Major Currencies Outlook (Oct 13 – Oct 18)

ECB meeting will highlight the packed week ahead of us which will also include inflation data from the UK, New Zealand and Canada as well Q3 GDP from China and employment data from the UK and Australia.

USD

Minutes from the September FOMC meeting showed that “substantial majority” of participants supported a 50bp rate cut. Majority of participants agreed that upside risks to inflation diminished and that downside risks to employment increased. Risks to employment and inflation goals now seen as “roughly in balance”. Michelle Bowman dissented, first dissent since 2005 and opted for a 25bp rate cut due to elevated inflation and solid growth. Participants noted that there is no need for further weakening in the labor market to bring inflation down to 2%. There was a mention of upside risks to inflation stemming from the geopolitical situation.

September CPI report saw headline number tick down to 2.4% y/y from 2.5% y/y in August while a 2.3% y/y reading was expected. On the monthly basis CPI printed 0.2% vs 0.1% as expected. Food prices rose 0.4% m/m after 0.1% m/m increase in August. Shelter rose by 0.2% m/m and 4.9% y/y. Services less energy services printed 4.7% y/y. Core reading ticked up to 3.3% y/y from 3.2% y/y the previous month. This is the first time core CPI came higher than previous month in over a year. Among components of core inflation airline fares had the biggest increase of 3.2% with used cars up 0.3% after declining by 1% the previous month. The numbers are coming in hot and showing that Fed should consider keeping rates unchanged in November.

The yield on a 10y Treasury started the week at 3.96%, rose to 4.10% and finished the week at around 4.08%. The yield on 2y Treasury started the week at 3.93%, reached the high of 4.05%. Spread between 2y and 10y Treasuries started the week at 5bp and finished the week at 13bp as curve remained upward slopping. The 2y10y was inverted for over two years. FedWatchTool sees the probability of a 25bp rate cut at November meeting at around 85%, while probability of a no rate cut is around 15%. Markets are fully pricing in December rate cut.

This week we will have retail sales expected to show further strength.

Important news for USD:

Thursday:​

• Retail Sales​

EUR

Minutes from the September ECB meeting showed that members expect inflation to increase by the end of the year and then converge towards the target by the end of 2025. They stated that disinflation process is moving as expected. Incoming data is pointing to a downside risks to growth. Members remain cautions on inflation, particularly core inflation as services inflation continues to come in stronger than projected. We had numerous speaker during the week talking about October rate cut which markets have fully priced in.

This week we will have ECB meeting. Markets have fully priced in a rate cut but there is uncertainty regarding rate cutting path. Investors are expecting December cut as well but ECB may signal that they will pause after October. Most likely they will emphasize “meeting-by-meeting” and “data dependent” approach as we will get two inflation and two PMI reports by December meeting where they will reveal new staff projections.

Important news for EUR:

Thursday:​

• ECB Interest Rate Decision​

GBP

After two months of no growth August saw GDP increase by 0.2% m/m. Growth was seen in all main sectors (services, production, construction) with highest seen in the production 0.5% m/m. Waning growth, three of last five monthly GDP prints showed no growth, should nudge BoE towards more aggressive cutting cycle.

This week we will get employment and inflation data.

Important news for GBP:

Tuesday:​

• Payrolls Change​

• Unemployment Rate​

Wednesday:​

• CPI​

AUD

Minutes from September RBA meeting showed that members were discussing both rate hikes and rate cuts. They did not see any meaningful changes in inflation or labor market since the last meeting, therefore, they decided to leave rate unchanged. Prerequisite for the rate cut would be a weaker than expected economy while a prerequisite for a rate hike is that inflation is not returned to target in an expected time period. Inflation is still too high and risks are skewed to the upside. Board members clarified that RBA policy does not need to move in line with policies of other economies, thus giving these minutes a more hawkish tone.

NDRC, essentially a state planner for the Chinese economy, characterized Chinese economy as largely stable stating that new policies will improve health of economic affairs. They stated that they are fully confident in achieving their 2024 economic goals. No new meaningful stimulus measures were announced at the meeting which caused markets to reevaluate and AUD got sold hard. Later during the week we got some new information indicating that additional Chinese stimulus will be unveiled over the weekend, on Saturday, which will lead to an interesting market open.

This week we will have employment data from Australia as well as Q3 GDP and other activity data from China.

Important news for AUD:

Thursday:​

• Employment Change​

• Unemployment Rate​

Friday:​

• GDP (China)​

• Industrial Production (China)​

• Retail Sales (China)​

NZD

RBNZ delivered a 50bp rate cut as expected lowering Official Cash Rate (OCR) to 4.75%, Low import prices have contributed to disinflation and committee asses annual CPI within its 1-3% targeted range. “Business investment and consumer spending have been weak, and employment conditions continue to soften.” Employment is expected to ease further, as economy is now in excess capacity. Minutes from the meeting show that committee assessed both 25 and 50bp rate cuts and opted for latter as it is more in line with their objective of low and stable inflation. OCR at 4.75% is still restrictive enough to help economy battle any near-term surprises. “The Committee agreed that excess capacity has dampened inflation expectations, and price and wage changes are now more consistent with a low-inflation environment.” Further rate adjustments will depend on how the economy evolves.

This week we will get inflation data for third quarter.

Important news for NZD:

Tuesday:​

• CPI​

CAD

September employment report saw economy add 46.7k jobs. The unemployment rate ticked to 6.5% from 6.6% in August while increase to 6.7% was expected. However, this came in part as a result of participants rate declining to 64.9% from 65.1% the previous month. Wage growth has continued to decline, although it is still at healthy 4.5% y/y vs 4.9% y/y in August. Composition of jobs adds more shine to the report as economy added 112k full-time jobs while part-time jobs declined by 65.3k. CAD had a terrible week due to markets pricing in a full 50bp rate cut by BoC. USDCAD has dropped for eight straight days.

This week we will get inflation data.

Important news for CAD:

Tuesday:​

• CPI​

JPY

Labor cash earnings in the month of August declined to 3% y/y from 3.6% y/y seen in July. Additionally, this has caused real earnings to print -0.6% y/y, thus returning into negative territory after two months of positive prints. Slow rising wages indicate that inflation cannot be sustained at targeted level and will deter BoJ from faster pace of rate hikes. Household spending printed -1.9% y/y vs -2.6% y/y as expected with base effects being the primary reason for the decline.

CHF

SNB total sight deposits for the week ending October 4 came in at CHF471.4bn vs CHF472.2bn the previous week. It is a negligible change as SNB does not see the need to fight the market which is buying Swissy on geopolitical tensions.