US
USD is mixed near this week’s high. JPY is underperforming as Bank of Japan rate cut bets fade to less than 10%, while commodity-sensitive currencies are modestly firmer. Futures on the S&P 500 are up, and global bonds pared back some of their recent gains.
USD will likely continue to trade within a tight range ahead of tomorrow’s release of the US September CPI and October PMI prints. The Cleveland Fed’s Nowcast model forecasts headline CPI to rise to 3.0% y/y (consensus: 3.1%) vs. 2.9% in August and core CPI to dip to 3.0% y/y (consensus: 3.1%) vs. 3.1% in August.
Progress towards the Fed’s 2% inflation goal is stalling, but upside risks to prices are not martializing. Headline CPI inflation has yet to reflect the rise seen in the ISM prices paid indexes, which may now be topping out. More importantly, wage growth is running around sustainable rates consistent with the Fed’s 2% inflation goal given annual non-farm productivity growth of around 2%.
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.
Crude oil prices jumped to a two-week high on concerns over supply disruption. Yesterday, the US imposed sanctions on Russia’s two largest oil companies Rosneft and Lukoil (both companies account for nearly half of Russia’s crude exports), freezing their US-linked assets and banning all transactions with US persons.
The fresh sanctions increase the challenge of buying Russian crude, but the supply disruption will likely be mitigated. Most Russian crude already flows through non-Western channels, paid for in local currencies, and handled by a vast “shadow fleet” outside US jurisdiction.
CANADA
USD/CAD is directionless around 1.4000 with technical support offered at 1.3961 (200-day moving average) and resistance at 1.4080 (October 14 high). Canada August retail sales print is unlikely to generate much financial market volatility (1:30pm London, 8:30am New York). Statistics Canada advance estimate indicates retail sales increased 1.0% m/m vs. -0.8% in July. In our view, USD/CAD risks are skewed to the downside because of a possible US-Canada trade deal next week and a pro-growth Canadian budget on November 4.
SOUTH KOREA
KRW underperforms despite the Bank of Korea’s (BOK) less dovish policy guidance. As was widely expected, Bank of Korea (BOK) kept rates at 2.50% for a third consecutive meeting. The Board again voted 6-1 to hold rates, with one member calling for a 25bps cut. The BOK maintained its rate cut stance “to mitigate downside risks to economic growth” but indicated “that the scale and timing of potential rate cuts have been adjusted.” Governor Rhee pointed out that less Board members (2 of 6) were open to a cut over the next three months compared with the August meeting (5 of 6).
As a result, the swaps curve no longer price-in odds of additional easing over the next two years. We would fade USD/KRW overshoots in part because KRW is undervalued, and South Korea has a large current account surplus (5.8% of GDP).
TURKEY
Turkey central bank (CBRT) is expected to slash rates 100bps to 39.50% (12:00pm London, 7:00am New York). Core CPI inflation slowed to 32.54% y/y in September (lowest rate since December 2021) vs. 33% in August, leaving room for a less restrictive monetary policy stance. Over the next twelve months, the swaps market is pricing in 800bps of easing.
