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Market Briefing: Dollar Trades Sideways on Market Cross-Currents

The dollar is turning in a mixed performance this morning as Treasury yields slip and major currency pairs move in diametrically opposed directions. Ten-year yields are holding around 4.17 percent and the trade-weighted greenback is back to levels that prevailed at the beginning of the month, with the big European units inching upward even as Asia falls.

The pound continues to ascend, building on gains achieved over the weekend when Boris Johnson pulled out of the race to succeed Liz Truss as British prime minister. With Rishi Sunak now at the helm, markets expect some semblance of fiscal orthodoxy to return, mitigating pressure on bond markets and giving the Bank of England room to focus on fighting inflation. Swap-implied pricing suggests policymakers will raise rates by 75 basis points next week, down sharply from the circa-150-point levels reached in mid September.

Plunging gas prices are helping lift the euro, and could set the stage for a sustained push toward – and potentially beyond – parity with the dollar. With rapidly expanding storage facilities nearing capacity and a spell of mild weather ushering in the winter, European natural gas is trading for less than €100 per megawatt hour for the first time since June, lowering the likelihood of an economically-devastating shock to household incomes, and hawkish monetary policy settings should provide a boost. The European Central Bank is expected to deliver a 75 basis hike at Thursday’s meeting, with more to come as policymakers narrow the gap with the Federal Reserve in the year ahead.

Exquisitely-timed intervention efforts from Japanese authorities managed to stem the bleeding in the yen, but the exchange rate is slowly pushing toward 150 mark once more. The currency surged when authorities dropped a couple hundred billions dollars into markets after trading in Tokyo closed on Friday night, and measures of front-month volatility have been crushed – but with imported energy prices falling, core inflation running below target, and wage pressures remaining almost non-existent, the Bank of Japan is unlikely to change direction when it meets later this week.

China’s renminbi is trading near a 14-year low against the dollar after selling off dramatically in yesterday’s session. Xi Jinping’s weekend decision to replace economic reformers with party loyalists on the Politburo Standing Committee augurs badly for markets, with the state now likely to push its tentacles deeper into the country’s business sector – leading to intensified economic conflict with the West.

Today’s data calendar is sparse, with the S&P Case-Shiller home price index and the Conference Board’s consumer confidence measure looking like the only major releases on tap. Markets think year-over-year price growth slowed from the previous month’s 16.1 percent to 14.4 in August as higher mortgage costs weighed on buying and refinancing activity. The consumer confidence index is seen slipping to 106 in October from 108 in September, but is expected to remain significantly stronger than the 95.30 nadir reached in July. Food and gas prices have resumed their ascent, and labour market conditions are beginning to cool.

Markets expect the Bank of Canada to deliver a 75 basis point rate hike tomorrow morning, but downgrades to the inflation and growth forecasts set out in the accompanying Monetary Policy Report could nullify any impact on exchange rates. September’s inflation data decelerated more slowly than expected, but with commodity and tangible goods prices rolling over, consumer sentiment deteriorating, and businesses warning of an imminent downturn, policymakers are likely to set the stage for a more cautious approach in the months ahead. Investors expect Canadian rates to reach lower heights and begin falling sooner than their American counterparts as the country’s more indebted private sector struggles to bear the burden.

Karl Schamotta, Chief Market Strategist

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