US

USD is firmer within its multi-day tight trading range, US 10-year Treasury yields are consolidating just under 4.00%, and S&P500 futures point to further record gains in the underlying index. Today’s FOMC policy decision will guide markets (6:00pm London, 2:00pm New York).

The FOMC is widely expected to follow up on September’s “risk management” cut with a 25bps Fed funds rate reduction to 3.75%-4.00%. The press release should reiterate “that downside risks to employment have risen” given that private-sector ADP payrolls unexpectedly fell in September. And, Fed Chair Jay Powell will likely stick to his cautious policy easing guidance amid the US government shutdown-driven data drought.

The surprise will come from the number of FOMC participants that dissent in favor of keeping rates on hold. Fed Governor Stephen Miran stated he would support again a 50bps cut at this week’s meeting. The risk is there’s one or two votes in favor of keeping rates on hold (we suspect Goolsbee and/or Musalem. That could offer USD intra-day support. Remember, the FOMC September 17-18 meeting minutes noted that “A few participants stated there was merit in keeping the federal funds rate unchanged at this meeting or that they could have supported such a decision.”

Finally, the FOMC is poised to announce plans to end the reduction of the Fed’s balance sheet (quantitative tightening). In an October 14 speech, Powell said “Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months…” Reserves - funds held by depository institutions at the Fed - total $2.93 trillion, slightly above the $2.7 trillion level Fed Governor Christopher Waller estimate is consistent with ample liquidity.

Yesterday, ADP announced it will begin releasing a preliminary weekly employment estimate every Tuesday. In its first print, ADP estimated the US private sector added 14,250 jobs in the four weeks ending on October 11. Separately, Amazon announced yesterday plans to cut around 14,000 administrative jobs.

The October US Conference Board consumer report offered mixed readings on the labor market. The labor differential index (jobs plentiful minus jobs hard to get) improved a bit to 9.4 vs. 8.7 in September, which was the lowest since February 2021. However, consumers were more worried about the labor market outlook over the next six months. Consumers’ jobs expectations (more jobs-fewer jobs) fell 3 points to -12, the lowest since April.

In our view, restrictive Fed policy can worsen the already fragile employment backdrop and lead to a further downward adjustment to Fed funds futures against USD.

CANADA

USD/CAD is trading heavy under its 200-day moving average (1.3952) ahead of the Bank of Canada’s (BOC) policy decision (1:45pm London, 9:45am New York). The BOC is expected to deliver a follow-up 25bps policy rate cut to 2.25% and publish a base projection in its October Monetary Policy Report for the first time since January.

The swaps market implies 90% odds of a 25bps BOC rate cut today and roughly 50% odds of an additional 25bps cut to a low of 2.00% in the next twelve months due to the drag on Canada’s economy from ongoing US trade policy uncertainty. Last week, US President Donald Trump terminated all trade negotiations with Canada and announced plans to hike tariffs on Canadian goods by an additional 10% because of Ontario’s advertising campaign critical of the White House's tariffs.

Nonetheless, we would fade the risk the BOC slashes the policy rate below the lower end of its estimated neutral range of 2.25% to 3.25%. Canada’s government is on track to deliver a stimulative budget on November 4, and underlying inflation is running hot. In contrast, the UK budget (scheduled for November 26) is anticipated to be a drag on the economy and leave room for the Bank of England to deliver more easing. As such, we expect further GBP underperformance versus CAD.

AUSTRALIA

AUD outperforms across the board and Australian bonds sold off. Australia Q3 CPI was a material miss to the upside, effectively ruling out an RBA rate cut next week. Headline CPI rose 1.3% q/q (consensus: 1.1%) vs. 0.7% in Q2 to be up 3.2% y/y (consensus: 3.0%) vs. 2.1% in Q2, reflecting higher electricity costs as government subsidies unwound.

The policy-relevant trimmed mean CPI, which excludes the impact of irregular or temporary price changes like the rise in electricity prices, was also red-hot. Trimmed mean CPI increased 1.0% q/q (consensus: 0.8%) vs. 0.7% in Q2 to be up 3.0% y/y (consensus: 2.7%) vs. 2.7% in Q2.

Trimmed mean CPI is tracking well above the RBA’s 2.6% projection and will keep the RBA on hold for some time. In fact, RBA Governor Michele Bullock warned on Monday that if trimmed mean CPI came in at 0.9% q/q (it printed at 1.0% q/q) “that would be quite a material miss.”

Similarly, the monthly CPI indicator shows quickening inflation pressures. The CPI indicator rose 0.5pts in September to a 15-month high at 3.5% y/y (consensus: 3.1%) and trimmed mean CPI increased 0.2pts to a six-month high at 2.8% y/y. The Australian Bureau of Statistics (ABS) will be transitioning from the quarterly CPI to a complete monthly measure of the CPI on November 26. The Monthly CPI will become Australia’s primary measure of headline inflation, replacing the quarterly CPI.

RBA cash rate futures slashed bets of a November 4 rate cut to virtually zero from over 50% before Australia’s Q3 CPI release. Over the next 12 months, cash rate futures price in just one 25bps cut (down from nearly 50bps) and the policy rate to bottom at 3.35%. Bottom line: AUD/USD can edge higher as the RBA is on track to ease more cautiously than the Fed and global economic activity is resilient.

JAPAN

USD/JPY briefly dipped below 152.00, with swaps market doubling odds of a BOJ rate hike tomorrow to 20% following comments by US Treasury Secretary Scott Bessent. Bessent argued that Japanese government’s “willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility.” We anticipate the BOJ to resume raising rates this week or at the very least deliver a hawkish hold which can further lift the beleaguered JPY (see here for details).