• October PMIs could reinforce US growth edge and lift USD.

• CPI in Canada, UK, New Zealand, and Japan to shape rate hike bets.

• BOI, MNB, BI, and BOK to hold rates. CBTR to cut. BSP to hike.

AI profitability concerns hit stocks and lifted bonds last week. USD fell against most major currencies, while worsening supply risks pushed crude oil prices higher.

The Treasury rally and USD pullback came despite a hot US September CPI print that reinforced the Fed’s hawkish bias. Nevertheless, calls for patience from many Fed officials (Bowman, Williams, Waller, Daly) kept expectations of a back-to-back October hike in check. Fed funds futures imply less than 20% odds of a hike on October 28 and still fully price a 25bps increase to 4.00-4.25% on December 9.

The synchronized correction in technology stocks and USD has led some to argue that the dollar is vulnerable to an AI-led equity market sell-off, as foreign investors unwind their US stock holdings. We disagree. An AI/tech unwind would simply encourage foreign investors to rotate back into safe-haven Treasuries, underpinning the dollar's defensive appeal.

In fact, USD tends to move in tandem with net foreign purchases of US Treasuries and in the opposite direction to net foreign purchases of US equities. That challenges the view that weaker foreign demand for US stocks would automatically drag USD lower.

We expect USD to recover this week especially if the October PMIs (Friday) confirm the US retains its growth edge over other major economies. CPI releases in Canada, the UK, New Zealand, and Japan will shape expectations for near-term rate hikes. Finally, central banks in Israel, Hungary, Indonesia, and Korea are seen holding rates steady, while Tukey is poised to cut and the Philippines to hike.

Inflation Checks

Canada September CPI (Monday). The data will test BOC’s Governor Tiff Macklem’s warning on Friday that “the risk that inflation broadens and becomes more persistent has gone up.” Headline CPI is seen at 3.2% y/y vs. 3.0% in August due to higher energy prices. Core CPI ex. food & energy is expected at 2.1% y/y vs. 2.1% in August, and the policy-relevant core CPI (average of trim and median) is projected at 1.95% y/y for a third straight month.

The BOC projects headline CPI at 2.5% y/y, and core CPI (average of trim and median) at 2.0% y/y in Q3. As such, core inflation above 2% y/y will lift odds for a 25bps BOC rate hike to 2.50% on October 28 (currently, 36% priced-in) and offer CAD support. In contrast, core inflation at or just under 2% y/y would leave CAD vulnerable to a modest dovish repricing.

UK September CPI (Wednesday). Headline CPI is expected at 3.4% y/y (BOE projection: 3.0%) vs. 3.1% in August, core CPI is seen at 2.8% y/y vs. 2.6% in August, and services CPI is projected at 3.6% (BOE projection: 3.6%) vs. 3.4% in August.

Ahead of that, the UK August labor market data is due Tuesday. The policy-relevant private sector regular pay growth is seen at 3.0% y/y vs. 2.9% in July, matching the BOE’s Q3 forecast and supporting Governor Andrew Bailey’s comments last week that there is little evidence yet of inflation becoming embedded in wage-setting.

The swaps curve price in 90% odds of a 25bps BOE hike to 4.00% on November 5 and 100bps of tightening in the next twelve months. In our view, the BOE may not need to tighten as much as markets anticipate, which is a drag on GBP. The UK economy is operating below capacity, the policy rate is near the top of the BOE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive following the October 28 UK budget.

New Zealand Q3 CPI (Wednesday). Headline CPI is expected at 0.8% q/q (RBNZ projection: 0.8%) vs. 1.5% in Q2 to be up 3.8% y/y (RBNZ projection: 3.9%) vs. 4.1% in Q2. Above target inflation argues for additional RBNZ rate hikes and offers NZD support. The swaps curve price in 80% odds of a 25bps RBNZ rate hike to 3.00% on October 28.

Japan September CPI (Friday). Headline CPI is expected at 2.1% y/y vs. 1.9% in August, core CPI ex. fresh food is expected at 2.1% y/y vs. 1.7% in August, and core CPI ex. fresh food & energy CPI is expected at 2.3% y/y vs.1.9% in August.

The BOJ is unlikely to crank up the pace of tightening with headline and core CPI ex. fresh food & energy tracking below its 2026 projection of 2.5%. The swaps curve price in less than 5% odds of a 25bps BOJ rate hike to 1.50% on October 30, and 80% probability of a hike on December 18. That leaves USD/JPY likely to trade within a 155.00-160.00 range in the near term.

Beyond the G10

Bank of Israel (BOI) is widely expected to keep rates on hold at 3.25% after delivering three consecutive cuts (Wednesday). Nevertheless, BOI has room to ease further as Israel headline CPI inflation has been running below the midpoint of the bank’s 1-3% target range since January. The swaps curve implies 125bps of cuts in the next twelve months.

Regardless, ILS will take its cue from tech stocks and Israel’s legislative election on October 27. Israel’s large tech sector, roughly 20% of GDP, ties ILS closely to the AI trade. Domestic politics could reinforce or offset that external influence. A Netanyahu bloc victory will likely revive the judicial overhaul and concerns over the rule of law, weighing on ILS. A centrist government could reduce institutional and geopolitical risks, supporting ILS.

National Bank of Hungary (MNB) is widely expected to keep rates on hold at 5.50% for a second straight meeting (Tuesday). MNB’s guidance to keep real interest rate positive and Hungary’s government plan to meet euro adoption conditions by 2030 remain important tailwinds for HUF.

Bank Indonesia (BI) is expected to keep rates on hold at 5.75% for a fourth straight meeting (Wednesday). However, a hike to curtail IDR weakness cannot be ruled out after MSCI’s surprise downgrade warning last week heightened the risk of capital outflow.

MSCI announced the launch of a consultation on a proposal to reclassify Indonesia’s stock index from Emerging Market to Standalone Market status, bypassing Frontier Market classification. MSCI will announce its final decision by the end of June 2027.

Türkiye central bank (CBTR) is expected to cut rates 100bps to 36.00% after standing pat the past five meetings (Thursday). High frequency indicators point to continued weakness in domestic demand in Q3, supporting the case for CBTR to resume easing. Bottom line: the steady uptrend in USD/TRY is intact.

Bank of Korea (BOK) is widely expected to keep rates on hold at 3.00% after hiking the last two meetings (Thursday). Overall, KRW fundamentals are positive: KRW is significantly undervalued, South Korea’s current account surplus widened to a record 13.5% of GDP in Q2, and BOK signaled more tightening was in the pipeline over the next six months.

Philippine central bank (BSP) is widely expected to raise rates for a fourth straight meeting by 25bps to 5.25% (Thursday). Philippines headline inflation is well above the bank’s 4% upper tolerance band, backing additional hikes. The swaps curve implies 100bps of tightening over the next 12 months, but negative real rates should keep upside pressure on USD/PHP.