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Market Briefing: Currency Markets Trade Sideways as Yields Creep Higher

Volatility expectations are inching back up, Treasury yields are climbing, and the dollar is firming as central bank officials keep making hawkish noises. Rate differentials tilted further in the greenback’s favour and terminal expectations moved higher during yesterday’s session after Minneapolis Fed president Neel Kashkari said rate hikes wouldn’t pause until core inflation subsides, and said “I don’t see why I would advocate stopping at 4.5 percent or 4.75 percent or something like that”.

The pound is down more than half a percent after an inflation report showed prices rising 10.1 percent in the year to September, higher than the 10 percent markets had expected. With the Bank of England likely to respond with more aggressive monetary tightening, growth is seen slowing, reinforcing stagflationary conditions in the British economy.

Japan’s yen is edging lower, but remains on the stronger side of the 150 mark as traders dare authorities to intervene. Next week’s Bank of Japan meeting is expected to bring a reiteration of the central bank’s commitment to keeping rates near zero.

Higher rates are likely to impact this morning’s US housing number, with starts seen tumbling to 1.47 million in September from 1.575 million a month earlier.

At a press conference this afternoon, President Biden is expected to authorize the release of 15 million barrels from the Strategic Petroleum Reserve in December – as previously planned – and open the door to more sales in the winter months. The move comes two weeks after the OPEC+ group of producing nations agreed to cut output, and as high inflation rates play a major role in the run-up to the midterm elections. The president is also expected to authorize a buyback program meant to replenish the stockpiles when prices fall below $72 a barrel, providing a longer term floor that should help support domestic producers.

Federal Reserve speakers include Kashkari, Evans, and Bullard. Short-term expectations are unlikely to shift materially in response, but terminal rates could still move higher.

The central bank will publish its latest Beige Book survey at 2 pm, potentially weakening market sentiment. According to the last iteration in September, “The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months.”

Canada reports September inflation in less than half an hour. Headline price growth is seen slowing to 6.7 percent from 7 percent in August, but the Bank of Canada’s preferred average of three core measures is expected to track closer to 5.2 percent. Odds on a 75 basis point hike at next week’s central bank meeting have slipped materially, with slowing economy supporting the case for a smaller 50 basis point move.

Karl Schamotta, Chief Market Strategist

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Higher for (even) longer