FX Market Briefing- 'Risks are Balanced' - Oct 9th

Last Week

USD: Washington averted a shutdown, but did little to lift the risk mood, focus shifted to U.S. data and the Fed's hawkish stance, propelling DXY and the 10-year yields to reach 4.88%. This suggests a prolonged Fed rate hike cycle. Attention centered on Powell's hawkish comments and 'higher for longer' policy, with Dec targeted for a final rate hike. Fed speakers were out in force this week including Fed’s Mary Daly how noted that policy is restrictive enough and the risks are balanced. The latter catches the attention of Fed watchers as it is a phrase that ex Fed Chair Greenspan used when marking a top in rates, raising questions if Daly was channeling the same message. Mixed data was produced from pre-NFP U.S. labor and ISM indices. U.S. NFP payrolls surged by 336k, outperforming the previous of 227k and expectations of 170k. It not only reinforces DXY's multi-week streak but likely upholds its strength into Q4. Strong labor market performance also counters prevailing recession concerns, expect GDP forecasts to hold strong into the year end.

CAD: USD/CAD surged 4 cents to top 1.3750, propelled by the USD, climbing yields, muted equities, and lower oil prices. Despite BoC Governor Vincent's hawkish rhetoric elevating hike prospects, Loonie remained unsteady. USCA yield spread hints at underlying CAD value. Canada added 63.8k new jobs, exceeding estimates for full and part-time positions, that put a bid tone for the Loonie to end the week. Commodity currencies AUD and NZD retreated as RBA and RBNZ held rates. MXN carry trade faces risk as yield spreads on long dated maturities narrow. The Loonie saw some buoyancy into the week ahead from geopolitical development in the West Bank as oil gained back as much as 5%, after last week's decline, due to the challenging situation.

EUR and GBP: EUR/USD’s decline stalled near 1.0450 with ECB speakers overlooking soft EU data for focusing on inflation. ECB overextending already is possible given weak trending PMIs and corporate credit, though German factory orders picked up after steep July decline. SNB interventions made CHF strongest in G10. UK/US 2Y spread shrank to 17bp, influenced by divergent Fed and BoE stances as UK has a less dramatic global inflation difference than originally perceived. Cable downside risk is present but found support around 1.20, despite weaker UK metrics and strong USD.

Riksbank's called for slower currency debt exposure reduction but it had limited SEK impact. SNB interventions made CHF strongest in G10. CEE starts to conclude tightening cycle as Poland cut rates by another 25bps while CNB minutes suggest a potential 25-50 bps cut in Dec.

JPY: Suspected but unconfirmed BoJ intervention in USD/JPY's flash crash to 147.30. Unlike last year's $70bn BoJ actions, Tokyo is silent.

The Week Ahead

USD: Greenback appears it will hold ground until sentiment pivots. This may be solidified if upcoming data, including CPI and PPI figures, align with hawkish FOMC comments and robust labor data. Fed speak is due, but the market has grasped hawkish tone distinctly. U.S. 10-year yield pressures could push closer toward 5.00%, but post-FOMC sentiment change, and year-end profit-taking could lower yields into Q1.

CAD: Canada has a limited calendar, building permits, which coincide with 5-year CAD bond auction. Observing whether a tightening in US-CA yields translates into CAD resilience will be interesting to follow. Strong Chinese inflation may signal robust demand, potentially impacting commodity prices and, by extension, the CAD.

EUR and GBP: UK is set to release a variety of data, including GDP and trade data. GBP/USD shows signs of bottoming out with room for upside. This comes with the caveat of a risk below the 1.20 level, especially if hawkish sentiment from the Fed and rising U.S. yields dominates. EUR/USD also has key data due, notably German inflation. A decline could give the ECB reason to further overlook the deteriorating manufacturing sector, exerting additional Euro pressure. ECB speakers are due next week and monitoring wage inflation will be the key theme. President Lagarde had an interview published over the weekend directly pinpointing on this risk, over the deteriorating growth data.

JPY: Absence of public fund data and lack of vocalization compared to last year makes last week’s BoJ ‘intervention’ debatable. BoJ may act more clearly if negative risk sentiment heightens. Japanese PPI and Tanken manufacturing survey will be watched.

--

If you'd like to discuss specific market dynamics or corporate FX risk management topics with us, you can reach our team at +1(415) 678-2808 or email us at [email protected].

Klarity FX is an independent fx risk management advisory partnering with corporations to help develop new or support existing treasury and risk management processes. Our team has worked for over 400 corporations across North America with our focus on supporting management teams to ensure they are better informed with their fx treasury decisions, remaining within compliance guidelines, executing with confidence, and ultimately improving their organization's financial flexibility.?Our team is not an fx bank, broker, or payments provider. We do not offer transactional products.

Dive deeper into corporate FX risk management topics at?Our Insights Page.

Disclaimer:?The details expressed in this transmission and accompanying documents are for information purposes only and are not intended as a solicitation for funds or a recommendation to trade. Klarity FX, Inc. accepts no liability whatsoever for any loss or damages suffered through any act or omission taken as a result of reading or interpreting any of the above information.