USD
After a slide to finish last week, the dollar starts this one on the front foot, with the DXY index up 0.1% this morning. This comes despite the key data point to kick off the new week coming from China, where both the 5 and 1-year loan prime rates saw marginally larger cuts than expected, dropping to 3.6% and 3.1% respectively, down from 3.85% and 3.35%. While in isolation this would point towards further stimulus to the Chinese economy – normally a positive dynamic for risks sensitive FX – on this occasion, it has not been enough to offer much support, we think for two reasons. First, markets remain wary regarding the state of the Chinese economy. Having seen too many false dawns heralding an improvement in growth, we suspect that traders are increasingly wary when it comes to stimulus efforts by authorities. Second, US election risks came to the fore over the weekend in a big way, with several high-quality national polls showing the gap between Trump and Harris has narrowed. If sustained over the coming days, this would put Trump in the driving seat to win the White House. Given the upside dollar risks stemming from a Trump presidency, and with November 5th just over two weeks away, markets are naturally moving to hedge this outcome, driving the dollar higher. This is likely to remain a theme for the remainder of the week too, with a light domestic data calendar likely to leave many traders focused on the election outcome as a key driver for the dollar.
EUR
While last week’s ECB meeting was sufficient to see EURUSD consolidate below 1.09, this week PMIs are in focus for euro traders. As we see it, seasonals tip the balance of risks strongly in favour of an undershoot relative to expectations, an outcome that would signal continued economic contraction in the bloc. If realised, this should heap further downside pressure on the single currency when figures are released on Thursday, skewing risks towards a run lower for EURUSD this week, with 1.08 the next level to watch for.
GBP
While PMIs will also be a point of note for the UK on Thursday – one which if recent releases are anything to go by, should be GBPEUR positive at the margin, we suspect the attention of sterling traders is likely to spend much of the week focused elsewhere. Specifically, BoE Governor Bailey is due to speak no fewer than four times this week, while his MPC colleague Breeden is set to speak twice. Both are swing voters on the MPC, so their commentary is likely to be seen as key for the prospects of cuts to Bank Rate before year-end. Beyond this, the upcoming budget of October 30th is looming increasingly large on the horizon, with risks that more grim messaging from the Treasury could weigh on sterling .
CAD
The one major central bank decision of significance this week is set to come from the BoC. We are looking for a 50bp cut, with markets currently split between looking for either that, or a smaller 25bp move lower for rates. In our view, however, recent data should tip the balance towards a larger dose of easing. September’s jobs data was artificially propped up by seasonal adjustments, the counterpart CPI print was unambiguously soft, while growth remains very weak. Given this, risks should be skewed to the downside for the Governing Council, warranting an accelerated pace of rate cuts. If we are right, this should see a further weakening in the loonie, potentially putting 1.39 in range for USDCAD.
