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Market Briefing: Currency traders brace for October inflation report

Markets are generally flat ahead of this morning’s inflation data. Investors are expecting to see more evidence of an easing in pressures, but are also prepared to sell assets if prices rise by more than anticipated.

The headline consumer price index is expected to rise 0.6 percent month-over-month in October, up 7.9 percent year-over-year. With food and energy excluded, the core measure is seen rising 0.5 percent and 6.5 percent. The pace of price changes has decelerated in recent months, but inflation remains near four-decade highs, well above the Federal Reserve’s target range.

Despite a small recovery this morning, the market for capitalist Tamagotchis continues to fall in value. The collapse of FTX has dragged valuations down across the crypto market, with Bitcoin down almost 77 percent this year. Despite comparisons with the Lehman Brothers default in 2008, cross-asset linkages remain relatively small, and signs of contagion in the traditional financial sector have been minimal. We’re relieved to know that no one actually considered replacing fiat currencies with such highly-speculative trading vehicles.

Hopes for a reversal in China’s “zero-covid” policies are fading as infection counts rise and lockdown restrictions multiply. Flare ups are underway in some of the country’s most economically-powerful regions – including Beijing, Guangzhou, and Chongqing – and statements from top leaders suggest that control efforts could be tweaked, but not rolled back in coming months. We remain watchful for signs of a wider deployment of mRNA vaccines in the world’s second-largest economy – something that seems to have proven politically infeasible thus far.

Oil prices are down sharply, with global benchmarks trading near two-week lows as demand concerns hit investor sentiment. Barrels of West Texas Intermediate are going for $85, and Brent is back near $92 after breaching the $100 mark earlier this week.

The Canadian dollar is trading north of 1.35 once more, weighed down by widespread risk aversion and deepening weakness in US equity markets. Success for the Democrats in the Georgia runoff election could help lift sentiment further out, but we don’t expect a repeat of the reaction two years ago, when a Senate seat flip set the stage for a continued fiscal spending boost. Persistent inflation concerns are likely to keep government spending constrained for many months – if not years – to come.

Initial claims for unemployment benefits are seen climbing to 220,000 in the week ended November 5. This might mark a modest increase from the 217,000 recorded a week earlier, but would confirm continued strength in the US labor market.

The day is crammed with Federal Reserve speeches, with Harker, Logan, Daly, Mester, George, and Williams all scheduled to talk. We expect officials to continue guiding market expectations toward a smaller, half-percentage-point hike at the December meeting, but differences in messaging could trigger low-intensity volatility in rates markets.

Tomorrow’s University of Michigan consumer sentiment data could prove market-moving. Inflation expectations seemed well-anchored until October – when the 5-to-10 year estimate jumped to 2.9 percent – making investors wary of further increases. The Fed and other central banks have suggested that they are focused on keeping consumer expectations restrained, meaning that an upside surprise could shift rate forecasts in a hawkish direction.

Karl Schamotta, Chief Market Strategist

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