Foreign Exchange Commentary

Summary

• Canadian dollar remains steady ahead of retail sales data at best level since October 10.
• The U.S. dollar climbed for the fourth straight day, Japanese yen leads G-10 currencies lower, AUD$ outshines.
• Japanese yen drops for a fifth day on fiscal concerns.
• U.S. Treasury yields remain below 4% on the benchmark 10-year bond.
• Swiss franc holds modest drop after Swiss National Bank releases meeting minutes.
• U.K. pound sterling remains resilient near $1.34.
• Mexico peso rangebound near strongest levels of the year hit on September 17.
• U.S. lack of economic data continues as government shutdown enters 24^th day.
• Both JP Morgan and Bank of America expect Federal Reserve to end quantitative tightening next week amid elevated repo rates.
• Taiwan Central Bank sees 2025 U.S. trade surplus at $120 billion.
• Crude oil prices surged recently on Russia sanction news as U.S. targets Rosneft, Lukoil refinery companies.
• China’s yuan holds steady as tariff deadline nears.

Noteworthy

• Dollar Strengthens Marginally as U.S. – China Tensions Ease
• U.K. Pound Sterling Remains Resilient

The U.S. dollar rose to its highest levels in almost a week against a basket of currencies on reduced fears over U.S.-China tensions, hopes for a resolution to the U.S. government shutdown and an easing of concerns over U.S. credit conditions.

U.S. Treasury yields edged lower overnight. The two-year Treasury yield edged lower by 0.1 basis point to 3.46%, while the 10-year Treasury yield fell 0.4 basis points to 3.98%, according to Tradeweb.  The closely watched ‘TED’ spread, or yield differential between the 10-year and 2-year maturities shrank slightly to 51.48 basis points.

Euro-zone bond yields slipped as U.S.-China tensions eased and an end to the U.S. government shutdown starts to look possible. The 10-year Bund yield fell nearly two basis points to 2.57%, while the 10-year French OAT yield was down 1.5 basis points at 3.35%, according to Tradeweb.

Elsewhere, the latest U.K. inflation data highlights that the Great British pound (sterling)’s resilience owes more to U.S. dollar weakness this year than to domestic strength, Monex Europe analysts say in a note.

Data released Wednesday showed U.K. headline inflation held at 3.8% in September and core inflation eased to 3.5%, compared to expectations for an acceleration in both measures. “We maintain our expectation for a December rate cut and continue to see limited upside for the pound ahead of the autumn budget,” the analysts said.

The U.K. government’s budget is due Nov. 26 and is expected to include fiscal tightening to fix public finances. Sterling traded flat at $1.3350. The euro currency fell 0.1% to 0.8688 British pounds. 

Thursday’s minutes of the Swiss National Bank’s (SNB) September meeting suggest the Swiss franc’s recent strength isn’t creating any undue headwinds for the central bank, according to FX analysts.

In the first time it has published minutes, the SNB said the full impact of previous interest-rate cuts will take effect with a lag and its policy is contributing to higher inflation. That indicates the Swiss franc’s strength isn’t a major concern even though the economy is expected to grow by just under 1% next year. “The SNB’s tone can therefore be interpreted as lessening the risks of a rate cut at the SNB’s next policy meeting in December” said one analyst at Rabobank in Europe.  The euro currency rose 0.1% to 0.9248 Swiss francs.

Today, the euro currency is likely to remain range-bound against the U.S. dollar, tracking broader risk sentiment in the absence of any major economic data. Aside from the European Commission’s consumer confidence report at 1400 GMT, there is little on the calendar Thursday, with traders instead looking ahead to key European purchasing managers’ surveys and delayed U.S. inflation data on Friday. Our medium-term bias is still modestly constructive on the euro currency as U.S. exceptionalism fades and fiscal support in the euro-area begins to gain traction one Comerica Bank FX trader stated.  The euro fell 0.1% but remained above $1.16.

In Asia, the U.S. dollar rose as oil prices rallied and the Japanese yen weakened.  Oil prices rose on supply disruption risks after the U.S. announced sanctions targeting Russia’s two largest oil companies Rosneft and Lukoil.  It should be noted - of Japan’s imports over 93% are oil, so they are heavily affected by price.

The Trump administration cited Russia’s lack of serious commitment to a peace process to end the Ukraine war. It comes after a meeting between President Trump and Russian President Vladimir Putin was shelved.   

Higher oil prices benefit the U.S. as a major oil producer. The Japanese yen fell as the market bets on looser fiscal and monetary policy under Japan’s new Prime Minister Sanae Takaichi (Japan’s first female prime minister).  The U.S. dollar rose 0.4% to a 9-day high near 153 yen earlier today, before retreating.

Separately, the Singapore dollar has the potential to reach parity with the U.S. dollar by 2040, say DBS economists in a report. A likely weaker U.S. dollar, Singapore’s steady productivity-led growth and safe-haven capital inflows are among reasons that could drive Singapore’s currency to appreciate, say Taimur Baig and others.

They believe the U.S. dollar—which they estimate to be stronger than justified based on fundamentals across currency fair-value metrics—could enter a multiyear period of correction. Meanwhile, safe haven flows into Singapore’s financial sector could grow in the coming years as the city-state aims to attract more investments and deepen its capital markets, they add. USD/SGD is 0.1% higher at 1.2990, at the time of this authorship.

Finally, foreign exchange traders are eagerly awaiting tomorrow’s Bureau of Labor Statistics (called back workers despite the government shutdown) read on U.S. inflation for clues as to the health of the U.S. economy and future Federal Reserve policy decisions.  Some traders feel the U.S. dollar could resume its significant downtrend in 2025 should sustained U.S. interest rate cuts become reality as many expect.  Other traders feel the biggest downward move in the U.S. dollar in decades is overdone and that interest rate cuts will boost U.S. growth and investment prospects and therefore benefit the U.S. dollar from what they consider a severe ‘oversold’ condition.