US
A possible US government shutdown first thing Wednesday morning is keeping USD under downside pressure, supporting Treasuries and driving gold prices to new highs. The logic is that a government shutdown could lead to a more dovish Fed. If a shutdown is brief, the Fed will ignore it. However, a prolong shutdown (more than two weeks), increases the downside risk to growth and raises the likelihood of a more accommodative Fed.
Meanwhile, the shutdown threatens Friday’s jobs report release. The US Labor and Commerce departments said yesterday that their statistics agencies would delay releases of economic data in the event of a partial government shutdown. Postponing the September non-farm payrolls report muddies the water for the Fed, depriving it of an important indicator for tracking downside risk to the economy at present.
Today, August JOLTS job openings data and September Conference Board Consumer Confidence index are noteworthy (both at 3:00pm London, 10:00am New York). Job openings are expected at 7200k vs. 7181k in July. If so the ratio of job openings to unemployed workers would slip 0.01 to 0.98, the lowest since April 2021, consistent with softer wages growth ahead and posing a headwind to consumer spending activity.
Consumer confidence is seen at 96.0 vs. 97.4 in August. But given the Fed’s concern that downside risks to employment have risen, pay attention to the labor differential index (jobs plentiful minus jobs hard to get) of the Conference Board report. That index dropped 1.3 points to 9.7 in August, the lowest since February 2021 and indicative of a rapid rise in the unemployment rate.
Bottom line: our base case is for the Fed to pivot more dovish by year-end, which will weigh on the USD and further fuel the rally in equity markets.
The US administration announced new tariffs yesterday. From October 14, the Proclamation calls for 10% global tariff on imports of softwood lumber, 25% global tariff on certain upholstered furniture, which will increase to 30% on January 1, 25% global tariff on kitchen cabinets and vanities, which will increase to 50% on January 1. CAD is underperforming because the US imports over 50% of Canada’s softwood lumber production.
The Bank for International Settlements (BIS) is expected to publish the preliminary results of its 2025 Triennial Central Bank Survey of Foreign Exchange and Over-the-counter Derivatives Markets. The previous survey, in April 2022, showed that trading in foreign exchange spot and OTC derivatives markets averaged a record $7.5 trillion per day with the US dollar on one side of 88% of all trades.
EUROZONE
EUR/USD is firmer near 1.1760 on USD weakness. Germany’s EU harmonized September CPI print is expected at 2.2% y/y vs. 2.1% in August (1:00pm London, 8:00am New York). Of note, the September EU harmonized CPI for France was 1.1% y/y (consensus: 1.3%) vs. 0.8% in August, Spain’s matched consensus at 3.0% vs. 2.7% in August and Italy’s rose to 1.8% y/y (consensus: 1.7%) vs. 1.6% in August.
Overall, Eurozone inflation is stabilizing at the ECB’s 2% medium-term target consistent with steady ECB policy and supportive of EUR. ECB President Christine Lagarde gives a keynote speech today (1:50pm London, 8:50am New York).
AUSTRALIA
AUD outperforms most major currencies. RBA stood pat and signaled that the bar for additional rate cuts is high. As was widely expected the RBA left the policy rate at 3.60%. The decision was unanimous. The RBA noted that “With signs that private demand is recovering, indications that inflation may be persistent in some areas and labour market conditions overall remaining stable, the Board decided that it was appropriate to maintain the cash rate at its current level at this meeting.”
The next RBA meeting is November 4 and cash rate futures trimmed bets of a 25bps cut to 38% vs. 48% before today’s policy decision. Over the next 12 months, cash rate futures continue to more than fully price-in one 25bps cut and rates to bottom around 3.35%. Bottom line: AUD/USD can edge higher as the RBA is on track to ease more cautiously than the Fed and global economic activity is resilient.
NEW ZEALAND
NZD/USD is up near 0.5800 after testing a low around 0.5750 last Friday. New Zealand’s September ANZ business outlook survey was encouraging, though the RBNZ remains on course for further easing. Business confidence was largely unchanged in September with a net 49.6% expecting better business conditions, expected own activity rose 4 points to a five-month high at 43.4% and reported past activity (the best GDP indicator) increased 4 points to 5%. The next RBNZ meeting is on October 8 and markets price-in 30% odds of a jumbo 50bps cut to 2.50% which is a headwind for NZD.
CHINA
USD/CNH is directionless around 7.1300. China’s September PMIs were mixed. The official PMI showed the contraction in manufacturing activity eased to 49.8 vs. 49.4 in August while the private-sector RatingDog PMI showed manufacturing activity expanding at the fastest pace in six months to 51.2 vs. 50.5 in August. Similarly, the official PMI showed non-manufacturing activity stalling at 50.0 vs. 50.3 in August while the private-sector RatingDog PMI showed services activity remained solid at 52.9 vs. 53.0 in August.
Overall, to address its soggy growth outlook, China must shift its growth model toward one in which domestic consumption plays a greater role. In our view, a gradual revaluation of China’s currency could help China stimulate consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
