US
USD is powering forward against most major currencies. A hawkish Fed and widening US economic growth outperformance suggest USD can keep flexing its muscle. Yesterday, Fed Governor Michael Barr’s warned that “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion.”
Today, New York Fed President John Williams highlighted the US economy shows “remarkable resilience”, inflation remains the “big challenge”, and “another rate hike may be appropriate by the end of the year.” Barr and Williams’ comments strengthen the case for additional Fed funds rate hikes.
In parallel, the US September PMI surprised to the upside, outpacing the Eurozone, UK, and Japan. The US composite PMI increased to a 62-month high at 58.4 (consensus: 55.3) vs. 56.0 in August. The details showed services growth quickened to a 59-month high, manufacturing rose to a 53-month high, and price pressures intensified.
The same forces lifting USD are driving Treasury yields higher and contributing to the global bond market selloff. US 10-year Treasury yields surged to 5.14%, the highest level since July 2007. The breakdown shows 10-year breakeven inflation rates edged up a bit on firmer crude oil prices. But higher real yields drove most of the move, reflecting stronger US private sector growth traction.
On deck today: US Q2 current account balance, weekly jobless claims, August new home sales, September Kansas City Fed manufacturing activity index, and a couple of Fed speakers.
The geopolitical focus is on the one-day summit between Chinese President Xi Jinping and President Donald Trump. Treasury Secretary Scott Bessent confirmed yesterday that both countries agreed to extend their trade war truce, which was set to expire on November 10, until January 10. Still, Bessent questioned whether a bigger trade deal with China can be done.
SWEDEN
SEK rallied against most major currencies. The Riksbank delivered a hawkish hold. As was widely expected, the Riksbank kept the policy rate at 1.75% for an eighth consecutive meeting and firmed up its hawkish bias. The statement noted that “the policy rate should be raised more going forward than projected in the June forecast” while signaling again it expects “the increases to the policy rate will begin this year.”
The Rishank’s new policy rate forecast implies nearly 75bps of tightening in the next twelve months to 2.50%, up from 25bps in June. That brings its rate outlook closer to the 125bps priced by markets and is supportive of SEK.
SWITZERLAND
CHF underperformed with the SNB stuck at ground zero. As was widely expected, the SNB kept the policy rate at 0.00% for a fifth consecutive meeting. However, the SNB pushed back against market pricing 50 to 75bps of hikes in the next twelve months.
The SNB stressed that “monetary policy is appropriate” to keep inflation within its price stability mandate of less than 2% per annum. While the SNB’s inflation projection was raised slightly due to higher prices for oil products, it remains below 1% over the entire forecast horizon.
Bottom line: widening US-Swiss and EU-Swiss yield gap will keep upside pressure on USD/CHF and EUR/CHF.
NORWAY
The Norges Bank delivered a hawkish hike. NOK outperformed in part because the market was split going into today’s policy decision. The Norges Bank increased the policy rate 25bps to 4.50%, after staying on hold the last two meetings, and signaled preparedness to “raise the policy rate further if warranted by the inflation outlook.”
Indeed, the Norges Bank new policy rate forecast implies a 40% probability of another 25bps hike to a terminal rate of 4.75% by Q2 2027. That’s largely in line with market pricing.
Bottom line: rising odds of additional Norges Bank hikes limits policy divergence with the Fed and USD/NOK upside. More importantly, Norway’s energy exposure remains a key tailwind for NOK.
AUSTRALIA
AUD/USD is down near support at its 200-day moving average at 0.7022 on broad USD strength. Australia’s August labor force report reinforced the case for a 25bps RBA hike to 4.60% next week (90% priced-in). The economy added more jobs than expected (actual: +39.5k, consensus: +20k, prior: -15.9k) driven by part-time employment (+45.8k vs. -30.8k in July). Full-time employment fell -6.3k vs. +14.9k in July.
The unemployment rate unexpectedly rose 0.1ppt to 4.6%, which was above consensus and RBA year-end projection of 4.5%. However, the increase in the jobless rate largely reflects a higher participation rate suggesting some tightness in the labor market persists.
Bottom line: rising odds of additional RBA hikes limits policy divergence with the Fed and supports AUD/USD. Additionally, Australia’s strategic exposure to commodities linked to energy, AI, and defense remains an important long-term tailwind for AUD.
