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Market Briefing: Currencies Hold Steady as Investors Brace for Inflation Data

With the week’s biggest data release set to drop in less than half an hour, financial markets are still hitting the snooze button. Treasuries are flat, futures are stable, and the dollar is slightly weaker as traders limit risk.

Investors expect the Bureau of Labor Statistics to report an acceleration in core inflation, adding to an already-compelling case for more tightening when the Federal Reserve meets in the first week of November.

Minutes taken during the Federal Reserve’s last meeting, released yesterday, delivered no new insight for market participants. Policymakers remained committed to their “higher for longer” mantra, noting that rates should move “purposefully” into restrictive territory and stay there for “some time”. Members supported continuing quantitative tightening at the current pace.

Treasury Secretary Janet Yellen also delivered an unsurprising message, telling the Bretton Woods Committee’s International Council that the world’s big economies should “continue implementing policies” to slow price growth, while warning the resulting “international spillovers” could put the global economy at risk. Her comments provided no indication of a coming pivot in US policy, instead focusing on what policymakers might do to help countries that suffer the consequences as financial conditions tighten and the dollar soars.

Price action in the pound continues to create whiplash effects on trading desks. The exchange rate jumped this morning after Bloomberg reported that government officials are considering how to walk back Kwasi Kwarteng’s unfunded tax cuts – a step that could reduce expected inflation rates and limit the country’s exposure to a sudden stop in capital flows. But gains could prove evanescent – many participants remain nervous about the implications for gilt markets when the Bank of England steps back over the weekend.

The euro-dollar pair remains stuck within a remarkably-tight trading range, with no obvious catalysts for a breakout in either direction. Energy storage levels are rising at a steady pace, the war in Ukraine continues to grind on, expectations for European Central Bank policy have hardened, and political risks in Italy have settled at a low simmer. Currency traders who thrive on volatility are left hoping for a sharp break in interest differentials – perhaps driven by hotter-than-expected US inflation data or signs of a policy pause from the Fed – to break the pair out of the doldrums.

Canada’s dollar continues to trade a little like an emerging market currency as hawkish monetary policy expectations act against the exchange rate. The loonie is holding near a two year low as investors position for a policy-induced slowdown in the economy, with even the biggest banks – known for taking conservative and consistently-optimistic views – now calling for a housing-driven recession by early 2023.

Front-month Brent and West Texas Intermediate prices are down for a third session after the International Energy Agency warned OPEC+ cuts could tip the global economy into a slowdown and demolish demand. The group, which advises OECD countries on energy, said “With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession”.

A dollar is buying almost 147 yen as still-wide yield differentials push the exchange rate toward a confrontation with Japanese authorities. Domestic inflation rates are well below global equivalents and the Bank of Japan remains committed to its yield curve control framework, meaning currency market momentum points to further downside – but a disorderly move lower could prompt the Ministry of Finance to step in again.

Karl Schamotta, Chief Market Strategist

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