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Market Briefing: Dollar Falls on Broad-Based Currency Market Reversal

The dollar is selling off and most major currency pairs are experiencing sharp trend reversals as investors bet on a less aggressive rate posture from the Federal Reserve. In a week defined by evidence of a slowing economy – consumer confidence, home prices, and manufacturing gauges all came in below expectations – many are reappraising Friday’s “stepping down” comments from the San Francisco Fed’s Mary Daly, and traders are now positioning for a slightly more cautious message from central bankers at next week’s meeting.

We’re not confident such a dramatic shift in tone is coming before year end, but stretched positioning across the foreign exchange markets would suggest that a number of currencies – including the yen, Canadian dollar, euro, and pound – could stage fairly violent rallies if investors grow more confident in an imminent “pivot” in Fed communications.

The pound is wobbling, but is trading near a six-week high after jumping almost 1 percent in yesterday’s session as investors bet the Rishi Sunak administration would put the country’s finances on a more sustainable track. The currency slipped a bit this morning when Chancellor Jeremy Hunt delayed the release date for a long-awaited fiscal statement to November 17, but evidence of stronger coordination between the government and other economic institutions has helped mollify investors. Mr. Hunt promised the plan would be accompanied by updated forecasts from the Office for Budget Responsibility, and noted that he had spoken with Bank of England Governor Andrew Bailey, saying “he understands our reasoning” for the postponement.

The euro appears to be rising in sympathy – briefly breaking through parity this morning – but a narrowing in interest differentials, particularly ahead of tomorrow’s European Central Bank meeting, could be playing a deeper role.

In what might have been the latest official attempt at stalling a profoundly-powerful currency trend, state-owned banks in China reportedly intervened to support the yuan last night, sending it soaring almost 1.8 percent against the dollar. We don’t have any hard evidence to suggest that the People’s Bank of China was behind the move, but the timing – coming after a politically-driven selloff – would certainly support the idea that authorities were growing uncomfortable with the currency’s decline. The yuan dropped sharply after the national party congress concluded this weekend, with traders and investors fearing Xi Jinping’s new Politburo would exert greater government control over the economy.

US new home sales are seen declining from August’s 685,000 to 595,000 in September. Beyond the Energy Information Administration’s weekly inventory numbers, no other major data releases are scheduled for today.

Markets expect the Bank of Canada to soften the impact of a 75 basis point hike with dovish growth and inflation forecasts when it releases its latest decision and monetary policy report at 10:30. Terminal rate expectations are hovering near 4.5 percent in Canada, roughly half a percentage point lower than in the US, and most investors expect the country’s central bank to begin cutting rates in the back half of next year.

Karl Schamotta, Chief Market Strategist

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