US
USD is holding on to most of yesterday’s gains. Global stocks are selling off with futures pointing to further losses for US equity markets. An upward adjustment to US interest rate expectations fueled by cautious comments by a handful of Fed officials is underpinning USD and undermining risk assets. Yesterday, Fed Vice Chair Philip Jefferson argued to proceed slowly with rates cuts “as we approach the neutral rate.”
Still, caution on easing isn’t shared by all Fed officials. Fed Governor Christopher Waller (one of the five finalists for the next Fed chair) made the case yesterday for continuing rate cuts. Waller warned the US labor market is still weak and near stall speed and he’s not worried about inflation accelerating or inflation expectations rising significantly.
Waller points out that downward pressure on wages, declines in vacancies and quit rates suggest low job-creation numbers are the result of declining labor demand rather than declining labor supply. As such, he supports cutting the funds rate by another 25bps at the next December 10 meeting (45%priced-in).
We agree with Waller’s labor market view and policy implication. Bottom line: USD is bound to come under renewed downside pressure.
Today’s ADP weekly employment preliminary estimate will offer the most current view of the US labor market (1:15pm London, 8:15am New York). Last week’s report showed that for the four weeks ending October 25 private employers shed an average of -11,250 jobs a week, indicative of weak labor demand.
Meanwhile, US continuing jobless claims increased in the week through October 18. Although continuing jobless claims are still low by historical standards, they are running above levels in 2023 and 2024, reflecting a lengthening in job-finding times. The other data due today are: August factory orders and the September TIC flows. Fed speakers include: Fed Governor Michael Barr and Richmond Fed President Tom Barkin (non-voter).
JAPAN
USD/JPY hit a 9-1/2-month high near 155.40 overnight. JPY largely ignored Japan Finance Minister Satsuki Katayama warning against excessive yen moves. Katayama noted she’s deeply concerned about recent FX moves and is watching them with a high sense of urgency.
Katayama’s warning on yen volatility rings hollow. A more hawkish Bank of Japan (BOJ) would do more to support JPY than the threat of intervention. However, the BOJ is in a hurry to resume normalizing rates which remains a drag on JPY. The swaps market implies 30% odds (down from 50% a week ago) of a rate hike at the next December 19 meeting, with a full 25bps rate increase priced for April.
BOJ Governor Kazuo Ueda offered no new policy guidance following his first bilateral meeting with Japan Prime Minister Sanae Takaichi. Ueda told the prime minister “We are in the process of making gradual adjustments to the degree of monetary easing”, given that “the mechanism for inflation and wages to grow together is recovering.”
AUSTRALIA
AUD/USD bounced back towards 0.6500 after testing support near its 200-day moving average (0.6458). The global equity market correction is weighing on AUD. The RBA Minutes of the November 4 meeting highlighted scenarios that could guide future policy decisions. Recall, at that meeting, the RBA voted unanimously to leave the policy rate unchanged for a second straight meeting at 3.60%.
According to the Minutes, three scenarios could lead the RBA to hold the cash rate target at its current level: (i) the emerging recovery in demand was stronger than expected, (ii) inflation remained high over coming months or productivity growth proved to be weaker than expected, or (iii) the Board changes its assessment that monetary policy was still slightly restrictive.
The RBA also looked at two scenarios that may warrant additional rate cuts: (i) the labor market weakens materially from its current state, or (ii) households are more cautious about spending than assumed.
The solid Australia October labor data supports the RBA’s scenario of keeping rates steady at 3.60% for some time. RBA cash rate futures imply roughly 50% probability of a 25bps cut to 3.35% in the next twelve months. Bottom line: there is room for Australia rate expectations to adjust in favor of AUD.
CANADA
USD/CAD is holding above 1.4000. Canada’s sticky underlying inflation backdrop backs the Bank of Canada’s (BOC) guidance that it might be done easing. In October, headline CPI eased to 2.2% y/y (consensus: 2.1%, BOC Q4 forecast: 2.0%) vs. 2.4% in September, reflecting lower gasoline prices. Excluding food and energy, CPI rose to an eight-month high at 2.7% y/y vs. 2.4% in September.
Core CPI (average of trim and median CPI) printed at 2.95% y/y (consensus: 3.00%, BOC Q4 forecast: 2.9%) vs. 3.10% in September, persistently above the 2% target. Markets imply a steady BOC policy rate at 2.25% over the next 12 months and rate hikes in the next two years. That limits CAD downside.
HUNGARY
National Bank of Hungary is widely expected to keep rates steady at 6.50% for a 14th consecutive meeting (1:00pm London, 8:00am New York). The bank should also reiterate that “For the rest of the year, inflation is expected to stay above the central bank tolerance band [3% +/-1%].” The swaps market price-in 60bps of cuts over the next two years. Regardless, Hungary’s positive real interest rates, loose 2026 fiscal stance, and current account surplus (1.9% of GDP in Q2) favor a firmer HUF.
