- Fed is poised to cut rates again. Watch-out for FOMC vote split.
- ECB and BOJ to stand pat. We see risk the BOJ lifts the policy rate.
- BOC to deliver a follow-up cut amid ongoing US trade policy uncertainty.
USD traded firmly within a tight range last week, buffeted by PMI data showing US private sector growth momentum outpacing other major economies and more evidence that upside risk to US inflation is not materializing.
A busy week of central bank decisions could stir some volatility, but not enough to shake USD off its range that’s held since June. Over the next three to six months, our base case remains for USD to edge lower undermined by a downward adjustment to US rate expectations and US protectionist trade policy.
The Blind Cut
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% (Wednesday). 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.
ECB to Hold the Line
The ECB is widely expected to keep the policy rate unchanged for a third consecutive meeting at 2.00% (Thursday). 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 one more 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 PMI data points to an ongoing recovery in economic activity.
Eurozone Q3 GDP is due on Thursday, and the October preliminary CPI is out on Friday. Consensus sees real GDP at 0.1% q/q vs. 0.1% in Q2, while the ECB projects the economy to stagnate in Q3 owing to a further unwinding of the frontloading of exports. Both headline and core CPI are projected to dip -0.1pts to 2.1% y/y and 2.3% y/y in October, respectively, broadly tracking the ECB’s 2025 projection of 2.1% and 2.4%.
BOJ: Crouching Dove, Hidden Hawk
The Bank of Japan (BOJ) is expected to keep rates on hold at 0.50% (Thursday). The swaps market price in just 11% odds of a 25bps rate hike this week and nearly 50% probability of a hike by December. A full 25bps rate increase is priced-in over Q1 2026.
We anticipate the BOJ to resume normalizing rates this week or at the very least deliver a hawkish hold which can lift the beleaguered JPY. Fiscal support is set to be ramped up and the Tankan points to an ongoing recovery in real GDP growth. Japan’s Prime Minister Takaichi ordered last week 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.
Moreover, Japan core inflation remains well above the BOJ’s 2% target and tracking above its projection. In July, the BOJ projected core ex. fresh food and core ex. fresh food & energy CPI to average 2.7% and 2.8% in 2025, respectively. New sets of macroeconomic projections are due at this upcoming meeting.
BOC Set to Trim Again
The Bank of Canada (BOC) is expected to deliver a follow-up 25bps policy rate cut to 2.25% (Wednesday). The BOC will also publish a base projection in its October Monetary Policy Report for the first time since January.
The swaps market implies 85% odds of a 25bps BOC rate cut this week 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 expected to deliver a stimulative budget on November 4, and underlying inflation is running hot.
Australia CPI on Deck
Australia’s Q3 CPI (Tuesday) will guide RBA November rate cut bets. Headline CPI is expected at 3.0% y/y vs. 2.1% in Q2 reflecting higher electricity costs as government subsidies unwound. Trimmed mean CPI, which excludes the impact of irregular or temporary price changes like the rise in electricity prices, is seen at 2.7% y/y vs. 2.7% in Q2 and would track above the RBA’s 2.6% projection. Softer than expected trimmed mean inflation will boost November rate cut bets, while a hot print will keep the RBA patient.
It’s worth noting, the Australian Bureau of Statistics (ABS) will be transitioning from the quarterly CPI to a complete monthly measure of the CPI in November. The Monthly CPI will become Australia’s primary measure of headline inflation, replacing the quarterly CPI.
The next RBA policy rate decision and Statement on Monetary Policy are due November 4. Cash rate futures imply 55% odds of a 25bps cut to 3.35%. Over the next 12 months, cash rate futures nearly fully price-in 50bps of easing and the policy rate to bottom around 3.10%.
RBA Governor Michele Bullock participates in a fireside chat on Monday. Bullock will likely continue to downplay the prospects of rate cuts beyond what markets already price-in. Recall, the RBA delivered a hawkish hold on September 30 noting that “private demand is recovering,…inflation may be persistent in some areas and labour market conditions overall remaining stable…”
EM Watch
Argentina mid-term legislative elections are held on Sunday. The stakes are high because the election will determine whether libertarian President Javier Milei’s party (LLA) can secure a working majority in Congress. Without it, Milei will face legislative gridlock, limiting his ability to implement free reforms (deregulation, austerity, and reduced trade barriers) aimed at tackling Argentina’s high inflation and crippling debt.
USD/ARS has been under upside pressure since Milei’s party got trounced in Buenos Aires’ provincial election on September 8. Investors saw the results as a sign of waning political support for Milei’s economic reforms. To calm market turmoil, the US Treasury signed an economic stabilization agreement with the Central Bank of Argentina, which includes a $20bn currency swap line. The US Treasury has also intervened directly to buy pesos (selling over $1 billion since October 9 according to local traders). It’s the first time the US intervened to defend another country’s currency peg under attack.
If Milei’s LLA party fares poorly in the election (less than 33% of the votes) the peso will come under heavy selling pressure and ultimately trigger a devaluation. Conversely, a strong LLA showing (over 37% of the vote) will likely support the peso and local assets.
Chile central bank is widely expected to keep the policy rate at 4.75% (Tuesday). At the last meeting September 9, the central bank unanimously voted to leave the policy rate at 4.75% due to the “risk of greater inflation persistence.” Sticky core inflation in September argues for maintaining the pause in the easing cycle that started in July 2023 with a 100bps cut to 10.25%. CPI excluding volatile items printed for a second straight month at 3.9% y/y, which is above the central bank’s 3% target and 2025 projection of 3.8%.
The swaps market price-in a total of 36bps of cuts in the next 12 months and the policy rate to bottom between 4.25% and 4.50%, consistent with a neutral policy setting. Chile’s central bank estimates the neutral range for the policy rate between 3.50-4.50%.
Colombia’s central bank is widely expected to keep the policy rate at 9.25% for a fourth straight meeting (Friday). Like in the previous three meetings, the vote split should remain unchanged at 4 (on hold), 2 (50bps cut), and 1 (25bps cut). The convergence of headline and core CPI inflation toward the 3% target is stalling and supports the case for keeping rates on hold. The swaps market implies steady rates over the next two years.
