US

USD is building on yesterday’s gains but continues to trade within a tight range in the absence of major US data releases. Indeed, FX volatility is well below its long-term average and near historic lows. We expect a bit more fireworks on Friday, with the release of the US September CPI and October PMI prints.

The ongoing US government shutdown continues to see no resolution as both parties remain at an impasse. Senators are scheduled to meet again on October 28 for a new vote. As of today (Day 22), this is the second longest government shutdown in history. If the government remains shut down until November 5 (Day 36), it will be the longest-ever. The longer the US government shutdown lasts, the greater the downside risks to the labor market and growth.

Fed funds futures continue to imply roughly 50bps of cuts by year-end to a target range of 3.50-3.75%, which is in line with the FOMC’s median projection. We anticipate the Fed to turn more dovish by the time of the December FOMC meeting because restrictive monetary policy can worsen the already fragile employment backdrop and upside risks to inflation are not materializing. Bottom line: USD downtrend is intact.

UK

GBP dropped against all major currencies as cooler UK inflation raised Bank of England (BOE) rate cut bets. In September, headline CPI printed at 3.8% y/y for a third consecutive month (consensus and BOE forecast: 4.0%), core CPI unexpectedly eased to 3.5% y/y (consensus: 3.7%) vs. 3.6% in August, and services CPI remained at 4.7% y/y for a second straight month (consensus: 4.8%, BOE: 5.0%).

The BOE next policy decision and Monetary Policy Report are on November 6. The swaps market price in roughly 70% odds (up from 40% before the CPI release) of a 25bps cut to 3.75% by year-end. Over the next 12 months, the swaps market implies between 50-75bps of easing and the policy rate to bottom between 3.25%-3.50%. The expected fiscal drag from the upcoming UK budget (scheduled for November 26) will likely leave room for the BOE to deliver more easing.

Bottom line: The UK’s disinflationary progress, albeit slow, reduces risk of the economy slipping into stagflation. That limits GBP/USD downside. Next support levels are offered at 1.3250 (October 14 low) and 1.3216 (200-day moving average). On the crosses, we see further GBP underperformance versus EUR and CAD. ECB is likely done easing, and the Canadian government is poised to unveil a stimulative budget on November 4.

JAPAN

USD/JPY is consolidating just under yesterday’s intra-day high of 152.17. Japan’s top trio - Prime Minister Takaichi, Finance Minister Katayama, and Economy Minister Kiuchi – all stressed the Bank of Japan’s (BOJ) independence.

Long-term JGB yields remain steady. PM Takaichi has ordered a fresh package of economic measures that is likely to exceed last year's ¥13.9 trillion (2.2% of GDP) supplementary budget to help households tackle inflation.

We anticipate the BOJ to resume normalizing rates next week or at the very least deliver a hawkish hold which can turbocharge JPY. Fiscal support is set to be ramped-up, the Tankan points to an ongoing recovery in real GDP growth and underlying inflation is making good progress towards the BOJ’s 2% target. Japan’s September CPI print is due tomorrow.

Japan’s swaps market price-in just 10% odds of a 25bps rate hike to 0.75% at the October 30 meeting and nearly 40% probability of a hike by December. A full 25bps rate increase is priced-in over Q1 2026

CANADA

USD/CAD is down near the lower end of its multi-day 1.4000-1.4080 range. The Bank of Canada’s (BOC) limited room to deliver more easing, despite a subdued growth outlook, is not CAD supportive. However, a possible US-Canada trade deal next week and a pro-growth Canadian 2025 budget on November 4 bode well for CAD.

Canada September inflation ran hot. Headline CPI rose to a seven-month high at 2.4% y/y (consensus: 2.2%) vs. 1.9% in August due to base effect. Core CPI (average of trim and median CPI) unexpectedly quickens to a 19-month high at 3.15% y/y (consensus: 3.0%) vs. 3.10% in August.

Upside risk to underlying inflation is not fading, suggesting the bar is high for the BOC to slash the policy rate below the lower end of its estimated neutral range of 2.25% to 3.25%. Canada’s swaps curve implies 75% odds of a 25bps cut to 2.25% at the next October 29 meeting and small odds of an additional 25bps cut in Q1 next year.

INDONESIA

IDR strengthened after Bank Indonesia (BI) unexpectedly left the policy rate on hold at 4.75% and signaled a more cautious easing cycle. The majority of analysts polled by Bloomberg had a 25bps cut penciled-in. Governor Perry Warjiyo stressed “We still see room for further interest rate reductions, but our current focus is on strengthening the effectiveness of monetary policy transmission that has been pursued so far (150bps of easing since September 2024), and maintaining the stability of the rupiah.”