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Market Briefing: Dollar Shows (Tentative) Signs of Exhaustion

The dollar bull is looking tired, but is not ready yet to keel over. With idiosyncratic issues hitting the yen and yuan, losses in the trade-weighted greenback still look relatively modest, but an improvement in global risk appetite is helping the pound, euro, and high-beta currencies inch higher ahead of the North American equity market open—and weakness could become more entrenched as signs of a maturing rate cycle begin to emerge against a sparse data backdrop.

The pound is trading within a consolidative range, with yesterday’s wholesale reversal of the government’s fiscal plans continuing to offer support – even as rollback in energy support measures threatens to raise inflation. With markets increasingly convinced Liz Truss will be forced out of leadership in the coming weeks, short positions on the currency are being hastily unwound.

Oil prices are down on reports suggesting the Biden administration is preparing another release from the US Strategic Petroleum Reserve. North America’s crude benchmark dropped almost 5 percent overnight after several media organizations said the White House is thinking about pushing another 10 to 15 million barrels into the market. The move comes after the OPEC+ group of producing countries agreed to cut production and as the Democrats seek to keep gasoline prices under pressure ahead of the mid-term elections. Both global crude benchmarks remain higher on the month, with West Texas Intermediate up roughly 7 percent and Brent up 3 percent.

The Canadian dollar is still on the defensive as traders remain focused on growing recession risks and wide interest differentials. Housing starts data, set for release at 8:15 am, is expected to weaken for a second consecutive month, with 265,000 units breaking ground. Starts tend to lag shifts in buying activity, but are critical in understanding underlying trends in Canada’s incredibly real estate-dependent economy. Yesterday’s Bank of Canada’s Business Outlook Survey showed the third-biggest fall in sentiment on record, with the drop only outdone during the pandemic and the 2008 global financial crisis.

Japan’s yen fell to a fresh 32-year low overnight even after Finance Minister Shunichi Suzuki said “There’s absolutely no change in our stance that we’ll respond appropriately against excessive moves”. The exchange rate looks increasingly likely to challenge—and break—the 150 mark, with a buildup in market momentum making it more likely authorities will be forced to intervene in a bigger, more obvious way.

China delayed the release of its third-quarter economic data, with some observers speculating that the government wishes to avoid releasing weak growth numbers during the ongoing 20th National Party Congress. We’re always wary of assigning simplistic motivations to actions taken within the country’s enormous bureaucracy: a state-owned media environment means China’s economic policymakers aren’t exposed to “embarrassment” like their Western counterparts, statistics have bee modified for political purposes for decades, and markets are well prepared for evidence of a slowdown. But movements in the yuan also suggest policymakers are trying to apply a veneer of stability. The central bank’s fix was set at 7.1095 last night—remarkably high relative to an offshore exchange rate trading closer to 7.2125—and media reports suggest state-owned institutions are actively selling the dollar against the renminbi, in what looks like another attempt at official intervention-by-stealth.

Industrial production is seen expanding 0.1 percent in September, losing momentum relative to the tangible goods-focused post pandemic period, but still firmly in expansionary territory.

US home prices are coming down as the Federal Reserve’s tightening efforts translate into a cooling in activity. The National Association of Home Builders expected to a report a 2-point drop in its housing market index between September and early October when it releases its latest data at 10 am.

Today’s Fed speakers include Atlanta’s Raphael Bostic and Minneapolis’ Neel Kashkari. Both are scheduled to discuss topics with policy implications, but history would suggest neither is likely to challenge consensus views.

Karl Schamotta, Chief Market Strategist

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