Forex Major Currencies Outlook (Oct 24 – Oct 28)

USD

Housing data showed building permits rise to 1564k from 1542k the previous month while housing starts declined significantly to 1439k from 1566k in August. Existing home sales continued to decline since February of this year and came in at 4710k vs 4780k the previous month. With mortgage rates rising over 7% housing data can only get uglier as we proceed with rate hikes.

The yield on a 10y Treasury started the week at around 4%, crossed the 4% level during the week and finished the week at around 4.27%. The yield on 2y Treasury reached 4.64% during the week and then dropped bellow 4.5% on Fed’s signalling that it will stop at 5%. Spread between 2y and 10y Treasuries started the week at -52bp and tightened to -27bp. FedWatchTool sees the probability of a 50bp rate hike in November at 3.5% with a probability of a 75bp rate hike at 96.5%.

This week we will have a preliminary Q3 GDP reading as well as PCE inflation data. Atlanta Fed model sees Q3 GDP at around 3%.

Important news for USD:

Thursday:

• GDP

Friday:

• PCE

EUR

ECB member Villeroy de Galhau stated in an interview that further tightening may slow down once the deposit rate gets to 2%. Markets are currently pricing terminal rate at around 3%. He also added that QT (Quantitative Tightening) may start around end of the year. Previous reports have suggested that QT will start somewhere in the 2023.

This week we will have ECB meeting and preliminary PMI data for the month of October. Markets are pricing almost a 90% probability of a 75bp rate hike as hawks dominate.

Important news for EUR:

Monday:

• S&P Global Manufacturing PMI (EU, Germany, France)
• S&P Global Services PMI (EU, Germany, France)
• S&P Global Composite PMI (EU, Germany, France)

Thursday:

• ECB Interest Rate Decision

GBP

Over the weekend BOE Governor Bailey came out with a statement suggesting that the next interest rate hike could be larger than what markets are expecting. He named high inflation as the main reason for stronger reaction than in August. GBPUSD gapped up on the market open and then proceed toward the 1.13 level.

Inflation in September returned into double digits and printed 10.1% y/y, up from 9.9% y/y in August. Core inflation continued to rise and printed 6.5% y/y, up from 6.3% y/y the previous month. Housing and housing services saw the biggest price increases followed by food and non-alcoholic beverages. BOE will continue its rate hike path in order to contain the inflation which is shattering people’s standard of living. A 75bp rate hike still seems to be the expected outcome, however possibility of a full 100bp rate hike is slowly creeping in.

Newly appointed Chancellor of Exchequer Jeremy Hunt stated that government will backtrack on most of the tax measures announced on September 23. He added that cap on energy prices will last until April of 2023. Prime Minister Truss was under a lot of pressure from within her own party especially after the backtracking on tax cuts, which was the platform she campaigned on. She announced her intent to resign but will remain in place of Prime Minister until new leader is chosen. A new leader should be elected by the end of the month. Former Chancellor of Exchequer who came in second to Truss in previous leadership vote, Rishi Sunak, is the biggest favourite for the new Prime Minister spot according to the polls.

This week we will have preliminary PMI data for the month of October.

Important news for GBP:

Monday:

• S&P Global Manufacturing PMI
• S&P Global Services PMI
• S&P Global Composite PMI

AUD

RBA meeting minutes from the October meeting characterized decision for a 25bp rate hike as “finely balanced”. They also showed that rates are not "especially high" and that further increases in rates are likely in the coming meetings. Employment report for the month of September showed employment change of just 0.9k vs 25k as expected. The unemployment rate and participation rate remained unchanged at 3.5% and 66.6% respectively. Full-time employment was a bright spot in report as it showed an increase of 13.3k.

Advancement of technology was the main point stated at the 20^th Party Congress. Technology was characterized as vital to economic development. The statement shows focus on high-quality education as well as self-sufficiency regarding technology. There will be no changes to the zero-Covid policy.

This week we will have Q3 inflation data. Chinese GDP data was delayed indefinitely so we may get them during the week.

Important news for AUD:

Wednesday:

• CPI

NZD

Q3 inflation data came in hotter than expected with 2.2% q/q and 7.2% y/y vs 1.6% q/q and 6.6% y/y as expected. RBNZ published it’s own inflation data and showed increase to 5.4% y/y from 5.2% y/y previously. The bank will continue increasing rates to fight the red hot inflation with many analysts now seeing a 75bp rate hike at November meeting. Global Dairy Prices fell for a second consecutive auction. The prices were down 4.6% with average price printing $3723. A small hint of demand destruction around the world.

CAD

Inflation data for the month of September showed a third consecutive decline in the headline number as it printed 6.9% y/y vs 7% y/y in August. Continued fall of gasoline prices helped pull inflation down. Core measures were unchanged with median printing 4.7% y/y, common 6% y/y and trimmed 5.2% y/y. Food inflation rose 11.4% y/y making it the fastest y/y pace since 1981!

This week we will have BOC meeting. Markets are divided between 50bp and 75bp rate hike. We are leaning toward a 75bp rate hike as inflation expectations reached a new high and labor market is still in good condition.

Important news for CAD:

Wednesday:

• BOC Interest Rate Decision

JPY

Headline inflation in August on national level remained unchanged at 3% y/y with ex energy component also rising to 3% y/y from 2.8% y/y in July and ex fresh food, energy inflation climbing to 1.8% y/y from 1.6% y/y the previous month. Ex energy component reached its highest level since 2014 but is still much lower than around the world and inflation picture will not spur BOJ into acting next week. USDJPY crossed the 149 level reaching the highest since 1990 and then on Thursday it crossed the psychologically important 150 level continuing to march on over the 151 level with the pair being up for 13 consecutive days! JPY has already lost 30% of its value against the USD since year started!

This all has changed as BOJ intervened in the markets on Friday in London fix. Their move dropped USDJPY toward the 145 level and although the pair recovered to almost 148 it was a strong signal from monetary authorities out of Japan. They did not confirmed intervention stating that they would not admit it even if they did it. Monetary policy divergence between the US and Japan is too great and that will keep pushing the pair up rendering these interventions dip buying opportunities. Caution is advised as the moves can get pretty wild.

This week we will have BOJ meeting as well as inflation data for the Tokyo area. No changes in monetary policy are expected, however it could be used as a chance for intervention in currency markets so caution is advised.

Important news for JPY:

Friday:

• BOJ Interest Rate Decision
• CPI

CHF

SNB total sight deposits for the week ending October 14 continued to decline and came in at CHF619.8bn vs CHF639.3bn the previous week. This is another big drop, almost CHF20bn, marking the third consecutive week of declines. SNB continues selling USD and EUR. One possibility is that they want to influence Swiss Average Rate Overnight (SARON) towards 0.50, so it matches the interest rate set by SNB.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}