US
USD and Treasury yields are consolidating their post FOMC meeting gains. The US and China agreed to a one year trade truce. Under the deal, both countries plan to cancel some tariffs, roll back export controls and reduce other trade barriers. Still, risk assets are trading on the defensive as hints of the agreement were already apparent earlier this week and the Fed dampened easing expectations.
FOMC delivered a hawkish cut yesterday. As was widely expected, the FOMC followed up with another 25bps Fed funds rate cut to 3.75%-4.00%. The press release warned again that “that downside risks to employment rose in recent months,” suggesting more cuts are in the pipeline.
However, the vote split and Fed Chair Jay Powell’s comments point to a more measured pace of easing ahead. That can help lift USD towards its August high. Fed Governor Stephen Miran voted again for a 50bps cut, which was well telegraphed ahead of time. But unlike at the September meeting, one participant (Kansas City Fed president Jeff Schmid) supported keeping rates on hold.
Importantly, Powell stressed that “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it,” adding “there's a growing chorus” supporting skipping a cut ahead. Fed funds futures trimmed odds of a December 25bps rate cut by nearly 0.20pts to 70% following Powell’s comments.
Finally, the FOMC confirmed it will conclude the reduction of its aggregate securities holdings (quantitative tightening) on December 1. This is to ensure liquidity condition remains ample and has minimal monetary policy implication.
JAPAN
USD/JPY rallied to its highest level since mid-February to around 153.90 with the next resistance offered at 155.00. The Bank of Japan (BOJ) delivered a neutral hold. This was in line with market expectations but not our base case scenario (we anticipated a hike or a hawkish hold). The BOJ kept the policy rate at 0.50% (90% priced-in) in a 7-2 majority vote. Like at the last September meeting, BOJ members Takata Hajime and Tamura Naoki, favored a 25bps hike to 0.75%.
BOJ Governor Kazuo Ueda stuck to the bank’s long-held guidance of raising rates if the outlook for economic activity and prices will be realized, adding the likelihood of this outlook materializing is rising gradually. The swaps market continues to see even odds of a December rate hike, with a full 25bps move priced in for January.
However, there’s no strong indication that the BOJ is in a hurry to resume normalizing rates which remains a drag on JPY. First, Ueda warned again that he does not think the possibility of the BOJ falling behind the curve on inflation is high. Second, the BOJ’s updated real GDP growth and CPI inflation forecasts are largely unchanged from the previous Outlook Report. Third, the BOJ reiterated that risks to economic activity are skewed to the downside for fiscal 2026 while risks to prices are generally balanced.
EUROZONE
EUR/USD retraced half of yesterday’s Fed-induced undershoot to be trading back above 1.1600. The ECB is widely expected to keep the policy rate unchanged for a third consecutive meeting at 2.00% (1:15pm London, 9:15am New York). There are no new economic projections associated with this policy-setting meeting. The next set of forecasts is due in December.
The swaps market continues to price-in about 50% odds that the ECB delivers a 25bps cut in the next 12 months and the policy rate to bottom at 1.75%. In our view, the bar for more ECB easing is high, which is EUR supportive. Eurozone inflation is stable around the ECB’s 2% target and Q3 GDP growth overshot expectations. Real GDP rose 0.2% q/q vs. 0.1% in Q2. Consensus penciled-in 0.1% q/q while the ECB projected the economy to stagnate in Q3.
NEW ZEALAND
NZD/USD is a little firmer just under key resistance at 0.5800. New Zealand’s October ANZ business outlook survey suggests green shoots are emerging. Business confidence rose to an eight-month high at 58.1 vs. 49.6 in September, expected own activity jumped 2 points to a six-month high at 44.6% and reported past activity (the best GDP indicator) was little changed at +5.
Nevertheless, the RBNZ remains on course to deliver additional easing because underlying inflation is within the RBNZ’s 1 to 3% target range. The next RBNZ policy decision/Monetary Policy Statement is on November 26 and markets price-in 90% odds of a 25bps cut to 2.25%. Resilient global economic activity offsets the drag to NZD from expectations of looser RBNZ policy.
CANADA
USD/CAD retraced all its post-Bank of Canada meeting losses but is holding under its 200-day moving average (1.3950). Bank of Canada (BOC) delivered a hawkish cut yesterday. In line with expectations, the BOC cut the policy rate 25bps to 2.25% (85% priced-in). The BOC emphasized that “Canada’s labour market remains soft” and “US tariffs and trade uncertainty have weakened the Canadian economy.”
However, the BOC said it plans to keep the policy rate at 2.25% “if inflation and economic activity evolve broadly as the BOC projects.” The BOC projects real GDP growth to average 0.75% SAAR in H2 vs. 0.2% in H1 and sees core inflation easing to 2.9% y/y over Q4 vs. 3.2% in Q3.
Indeed, we doubt the BOC slashes the policy rate below the lower end of its estimated neutral range of 2.25% to 3.25% which bodes well for CAD. Canada’s government is expected to deliver a stimulative budget on November 4, and underlying inflation is running hot.
