Hakuna Matata

• Foreign investors remain largely unfazed by the chronic U.S. fiscal imbalance. Foreign holdings of U.S. Treasuries rose to an all-time high in September.

• Dollar on the back-foot in data lull. Second-tier U.S. economic data are released today.

• Canada’s October CPI print will guide near-term Bank of Canada rate expectations.

USD is trading on the defensive after reaching a fresh cyclical high last week. Friday’s November PMI data for major economies could spark the next USD upswing, as it will likely highlight that growth momentum still favors the US economy.

In the meantime, the U.S. TIC data showed underlying demand for the dollar is robust. Net foreign purchases of long-term U.S. securities increased to a one year high at $1041bn in the 12-month to September vs. $793bn the previous month, eclipsing the cumulative U.S. September trade deficit of US$855bn.

The surge in net foreign purchases of long-term U.S. securities in September was driven by private sector purchases of Treasury bonds and U.S. equities. Moreover, foreign investors remain largely unfazed by the chronic U.S. fiscal imbalance. Foreign holdings of U.S. Treasuries rose to an all-time high of $7.5 trillion in September.

U.S. October housing starts and building permits are today’s data highlights (1:30pm London). Kansas City Fed President Jeff Schmid (2025 voter) gives a speech on the economic outlook and monetary policy (6:10pm London).

USD/JPY is holding above technical support at 154.00. Japan’s Finance Minister Kato stuck to the government’s well-honed currency script. Kato acknowledged there has been sharp one-way movements in the yen since late September and that it’s important for exchange rates to remain stable, reflecting the fundamentals of the market. Kato added the ubiquitous warning that officials will closely monitor developments in the currency market, including any speculative activities.

EUR/USD retraced some of yesterday’s relief rally. Nonetheless, EUR/USD will remain under downside pressure in part because the ECB is more dovish than the Fed. ECB Governing Council member Vujcic warned yesterday “certainly the risk of undershooting the target has now increased compared to six months ago”. Also, ECB Governing Council member Stournaras noted that the neutral rate is on average at about 2%. This means the ECB policy rate is currently too restrictive at 3.25%, heightening the downside risk to the Eurozone economy. The Eurozone September current account balance is up next (9:00am London).

GBP/USD is range-bound near yesterday’s high. Comments by BOE MPC member Greene reinforced the case the BOE may pause easing at its December 19 meeting. Greene noted that “services inflation hasn’t been coming down as quickly as I’d like to see…There’s some risk that wage growth might be stickier than we would hope, and consequently services inflation and overall inflation might be too.” BOE Governor Andrew Bailey and other MPC members appear in front of the U.K. Parliament's Treasury Committee (10:00am London).

CAD and Canadian bonds will take their cue today from Canada’s October CPI print (1:30pm London). Headline inflation is expected at 1.9% y/y vs. 1.6% in September while core inflation (average of trim and median CPI) is anticipated at 2.4 y/y vs. 2.35% in September. The Bank of Canada (BOC) projects headline and core CPI inflation to average 2.1% and 2.3% over Q4, respectively.

Overall, the BOC has room to dial-up easing because inflation is now close to 2%, and inflationary pressures are no longer broad-based. Additionally, monetary policy remains too tight, heightening the downside risk to the economy. At 3.75%, the BOC policy rate remains above the bank’s nominal neutral interest rate estimate of 2.25% to 3.25%. Cooler than expected inflation in October can reinforce the case for a 50bps BOC rate cut at the December 11 meeting and undermine CAD. Market is pricing-in about 40% odds of such a cut.

AUD/USD is holding on to yesterday’s gains above 0.6500. The RBA Minutes of the November 6 policy meeting supports the case the RBA is in no rush to start easing policy. Members noted that a faster than currently forecast decline in inflation “could warrant an easing in the cash rate target, but that they would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.” Australia’s Q3 CPI tracked the RBA’s forecast. The Q4 and Q1 CPI prints are due end-January and end-April, respectively. This indicates that the RBA is likely to wait until after the release of the Q1 CPI data before considering rate cuts, likely at its May 7 policy meeting. RBA cash rate futures imply a first full 25bps cut in May.

National Bank of Hungary is expected to keep rates steady at 6.50% (1:00pm London). At the last meeting October 22, the bank kept rates steady and said that “In the Council's assessment, re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates.” Deputy Governor Kandracs stressed that “We’re not at all afraid to maintain the current base interest level for an extended period.” The swaps market is pricing in 50bps of cuts over the next 12 months followed by another 25bps over the subsequent 12 months that would see the policy rate bottom near 5.75%.