Foreign Exchange Commentary

Summary

• Canadian dollar rose for a fifth day (most in 2 months) after weak U.S. jobs data as reported by Challenger, Gray, and Christmas.
• The U.S. dollar is trading at its best levels against rivals since August after a sharp rally since the end of October despite declining in the past 48 hours.
• Japanese yen gains marginally after remaining weak near 154 per one U.S. dollar; JGB’s fall.
• U.S. Treasury yields remain solidly above 4% on the benchmark 10-year bond yield, currently at 4.09%.
• Australia and New Zealand currencies are both trading within recent ranges; AUD$ 1-week volatility jumps with key jobs data in view. The Reserve Bank of New Zealand’s (RBNZ) Hawkesby says labor market has deteriorated as expected.
• U.K. pound sterling pares gain, after Bank of England diverges from U.S. Federal Reserve and holds interest rates steady today.
• Mexico peso weakens to above 18.60.
• The U.S. lack of economic data continues as the longest-ever government shutdown is now in its’ sixth week.
• Treasury Secretary Bessent says he is ‘optimistic’ after SCOTUS tariff hearing.
• EIA: Crude +5,202k Bbl, median estimate -286k Bbl.

Noteworthy

• U.S. Dollar Declines For 2^nd Day Amid Signs of Jobs Cuts Ahead
• U.K. Pound Sterling Falls Against Euro as BoE Holds Rates Steady

Treasury yields and the U.S. dollar declined as more economic data went missing under the longest-ever U.S. government shutdown. The Challenger Report (Challenger, Gray, and Christmas private job cut data) says companies last month planned to cut 153,074 jobs.

This brings U.S. job eliminations to over 1 million for the calendar year.  It’s also the highest October job loss total since 2003; over two-decades and a 175% increase in year-over-year terms.  In addition, the Challenger job cuts report showed the highest total for cuts for a single month in the fourth quarter since 2008.

The report gains relevance in the absence of official figures given the historic U.S. government shutdown.  However, it comes after stronger-than-expected private-sector indicators yesterday, as reported by ADP at +42,000 jobs in October versus market expectations of a gain of just +22,000.

This pushed up U.S. yields which have remained elevated near 4.10% on the 10-year Treasury bond. Elsewhere, the U.S. Supreme Court is seen as potentially leaning towards curbing Trump’s power to impose tariffs, but a final decision isn’t imminent.

The U.K. pound sterling fell briefly before rebounding after today’s Bank of England (BoE) rate decision to keep interest rates steady at 4% as there are clear disagreements within the Monetary Policy Committee (MPC).  Despite this the chance of a December interest-rate cut has increased one currency analyst said in a note.

The BoE voted 5-4 to keep rates unchanged with four members preferring a 25 basis-point rate cut. The vote was tighter than expected. The removal of the word “careful” from the BoE guidance about future rate cuts shows its stance is less cautious. However, the MPC looks divided, so December’s decision appears “very much data dependent.”

The BoE said inflation is judged to have peaked.  If progress on disinflation continues, rates are likely to continue on a gradual downward path.  Sterling was last up 0.4% trading at $1.3105, having initially fallen after the BoE announcement. The euro is steady at 0.8801 per British pound.

Within continental Europe, the euro currency could stabilize as it could be viewed as undervalued versus the U.S. dollar after its recent fall since late October.  One currency analyst said the dollar’s rally from near $1.17 to below $1.15 has extended beyond what can be justified by short-term drivers including interest rate differentials and safe-haven demand following recent declines in equities.  Another major European bank estimated that a 1.3% undervaluation in the euro against the dollar was justifiable.

Further euro currency falls would require some significant premium build-up on the euro or a further reduction in U.S. rate-cut expectations currency traders said. One currency trader stated, “We expect instead some stabilization in the pair in the coming days with upside risks to $1.16.” Yesterday the euro currency hit a three-month low of $1.1468.

What has driven recent U.S. dollar strength since late October?  The U.S. dollar reached a five-month high against a basket of currencies in the previous session following better-than-expected U.S. data. The ADP private payrolls report and the ISM services purchasing managers’ survey exceeded expectations on Wednesday.

Specifically, yesterday, Treasury yields, and the U.S. dollar gained after the October ISM services PMI landed above analysts’ expectations, showing the services economy is in expansion mode. Oliver Allen of Pantheon Macro suggests the relatively solid reading could be a sign the government shutdown is placing only a limited drag on the economy, although he cautions “the headline ISM index is too unreliable a guide to actual growth in services activity to treat it with much confidence.”

Relative to Tuesday, traders are slightly reducing bets on a December rate cut, which they now assign a roughly 65% probability.

The data fueled doubts over another interest rate cut in December in the wake of last week’s Federal Reserve meeting where Federal Reserve Chair Jerome Powell sounded cautious about further policy easing. The dollar’s recent gains also reflect demand for safe havens, but this waned overnight as U.S. equities recovered following strong earnings and buying the dip in artificial intelligence shares.

Finally, the Japanese yen is likely to recover in the coming months on the prospect of another Bank of Japan interest-rate increase which would potentially prevent the need for foreign-exchange interventions, Rabobank said in a note.

If the Japanese yen’s recent fall versus the dollar is maintained, there is a “strong risk” that Japan’s Ministry of Finance could use intervention to prop up the currency, the note stated. However, speculation of a December interest rate hike could build in the coming weeks, supporting the Japanese yen.  Rabobank expects the U.S. dollar to fall to 147 yen within three months.