The conclusion of the Communist Party congress in China has garnered much market attention over the last few days and culminated in intense pressure on Chinese equities yesterday. USD/CNY has been pressing the upper limit of its +/- 2% daily trading range – and now that the Congress is finished – the PBoC has allowed an onshore fixing much higher at 7.1668. This suggests it will now allow market forces to play a greater role in setting the CNY/USD rate. The reason we dwell on renminbi developments is that the two episodes of PBoC-sanctioned CNY weakness earlier this year saw some of the strongest dollar gains of the year. Some currencies are directly managed against the CNY – for example, the Singaporean dollar – but many emerging market currencies and currencies in the G10 space (including the euro) have strong positive correlations with the renminbi. A move in USD/CNY to 7.40 or higher should provide a supportive backdrop to the dollar over the coming weeks.
For today, the US data highlight will be the October consumer confidence reading. This has recently bounced given lower gasoline prices and good employment prospects. We doubt the data has much impact on Fed pricing, where the terminal rate is still priced near 4.90% for next Spring.
The US dollar is trading quietly against the Canadian dollar in a 20-25 tick range on either side of the 1.3705 settlement. The intraday momentum indicators are stretched, suggesting, the greenback may pullback in the North American session, ahead of tomorrow Bank of Canada meeting. Market sentiment has swung from not even fully discounting a 50 bp hike earlier this month to about a 1-in-3 chance of a 100 bp move, which seems a bit much. Look for a dull and quite trading day ahead for tomorrow’s BoC. Observe the USD/CAD trends.
The focus of the European morning will be the German October IFO data - it looks as though the eurozone is already in recession. Another soft IFO reading today will add to that sentiment but is unlikely to have much bearing on Thursday's ECB meeting. ECB hawkishness has not helped the euro this year and EUR/USD rallies are likely to be capped around 0.9950. Look for the euro to continue to struggle in the coming months.
Rishi Sunak will be given the keys to 10 Downing Street today. He has talked up the 'profound' challenges facing the UK economy, following on from Chancellor Jeremy Hunt's remarks that 'eye-watering' decisions will have to be made on spending decisions. 31 October is going to be a massive day for UK financial markets as Sunak/Hunt present their fiscal fix. But given the greenback’s dominance, we doubt GBP/USD will trade above 1.15 and but likely retain sub 1.10 targets for later in the year.
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