US equity futures are rebounding from last week’s chipmakers rout, while France leads European stocks lower. Bonds are broadly steady outside France and crude oil prices eased from a five-month high.
USD recovered some of Friday’s drop, on broad EUR weakness. EUR/USD is trading heavy near support at 1.1200, undermined by widening French 10-year bond yield premium over Germany. Public anger over the high cost of living and conditions in schools is compounding France’s budget crisis, worsening the already fragile fiscal backdrop.
Still, the turmoil remains largely domestic while the ECB’s backstops should help contain spillovers to other Eurozone economies. That limits the drag to EUR. Technically, EUR/USD first line of defense is at 1.1200 (August-September 2024 double top), followed by 1.1111 (50% retracement of 2025-2026 uptrend). A break below the latter would leave the pair vulnerable to a deeper decline.
CANADA
USD/CAD extended last week’s drop ahead of Canada’s September CPI print (1:30pm London, 8:30am New York). The data will test BOC’s Governor Tiff Macklem’s warning on Friday that “the risk that inflation broadens and becomes more persistent has gone up.” Headline CPI is seen at 3.2% y/y vs. 3.0% in August due to higher energy prices. Core CPI ex. food & energy is expected at 2.1% y/y vs. 2.1% in August, and the policy-relevant core CPI (average of trim and median) is projected at 1.95% y/y for a third straight month.
The BOC projects headline CPI at 2.5% y/y, and core CPI (average of trim and median) at 2.0% y/y in Q3. As such, core inflation above 2% y/y will lift odds for a 25bps BOC rate hike to 2.50% on October 28 (currently, 66% priced-in) and offer CAD support. In contrast, core inflation at or just under 2% y/y would leave CAD vulnerable to a modest dovish repricing.
AUSTRALIA
AUD is outperforming, with AUD/USD trading near the top of its three-week 0.6900-0.7000 range. RBA Assistant Governor Christopher Kent noted the “Aussie dollar at the moment is marginally above the long-run equilibrium estimates for the real trade-weighted index.” Indeed, the IMF estimates AUD overvaluation at 17% on a real effective exchange rate basis.
Nonetheless, AUD/USD is generally in line with real and nominal 2-year Australia-US interest rate differentials, suggesting its lofty valuation poses little immediate downside risk.
CHINA
USD/CNH broke to fresh multi-year lows near 6.6800. China’s economy grew more than expected in Q3 and is tracking the government’s 4.5% to 5.0% growth target for 2026. Real GDP was up 1.2% q/q (consensus: 1.0%) vs. 0.9% in Q2 and in the three quarters to the year printed at 4.6% y/y.
China’s growth target is used as a policy tool to guide economic/social planning rather than a reflection of underlying supply and demand dynamic. That means the quality and sources of China’s growth is more relevant for investors.
From that perspective, China’s long-term economic health remains weak because consumer spending is struggling to gain traction and non-residential fixed asset investment is an ongoing drag. In the first three quarters of the year, retail sales growth was unchanged at 1.1% y/y vs. 1.1% in August, and fixed asset investment growth excluding real estate development fell -4.2% y/y vs. -4.2% in August.
Regardless, USD/CNH downtrend is intact in our view reflecting both CNH internationalization potential and China’s internal rebalancing story.
