FX Weekly Recap: October 7 – 11, 2024

The forex markets saw many themes at play, including geopolitical developments, central bank commentary, and top tier economic releases.

Safe-havens like the Swiss franc and Japanese yen outperformed, while the “risk-on” currencies rode a rollercoaster of broad risk sentiment headlines and individual country stories.

USD Pairs

The U.S. dollar had a volatile week, starting strong and holding ground as traders digested economic data, central bank commentary, and geopolitical developments.

Monday-Tuesday: Strong Start on Rate Cut Recalibration

The dollar kicked off the week on an arguably positive note, building on momentum from Friday’s strong jobs report. This data lowered expectations for an aggressive 0.50% Fed rate cut in November, pushing 10-year Treasury yields above 4% for the first time since August.

The dollar index climbed for the seventh straight day on Tuesday, likely also benefiting from broad risk-off sentiment as Chinese equities fell on skepticism around vague stimulus plans. The U.S. Trade Balance report, showing a narrower deficit than expected, possibly provided additional support for the Greenback.

Midweek: FOMC Minutes and Shifting Sentiment

Wednesday saw continued dollar strength as the FOMC minutes revealed a “substantial majority” supported September’s 50bps rate cut, though some members favored a smaller reduction. This uncertainty, coupled with comments from Fed officials supporting a more gradual approach to easing, helped maintain the dollar’s position. However, the rejection of a fixed rate cut path in the minutes began to temper some of the dollar’s gains.

Thursday-Friday: Data-Driven Volatility

Volatility picked up on Thursday with the release of key economic data:

• U.S. CPI Report: September’s headline inflation held steady at 0.3% m/m (0.2% expected), while core CPI remained at 0.2% m/m (0.1% expected). The hotter-than-anticipated figures further reduced the likelihood of a 0.50% Fed rate cut in November.
• Weekly Initial Jobless Claims: Weekly initial claims came in higher than expected at 258K (231K forecast), introducing some uncertainty about labor market strength.

These mixed signals created choppy trading conditions for the dollar. The currency faced additional pressure on Friday following a weaker-than-expected U.S. PPI report, leading to a notable decline against several major currencies. The preliminary University of Michigan consumer sentiment index for October release later in the day prompted additional bearish vibes, but not enough for the U.S. dollar to lock the week in a broad net winner.

Bullish Headline Arguments

• FOMC members support more gradual pace of rate cuts:
  • FOMC Sept meeting minutes shrugged off economic downturn concerns in near- or medium-term
  • Raphael Bostic said the labor market has slowed down but is not slow, and he remains “laser-focused” against the inflation that’s still “too high”
  • Raphael Bostic added a few days later that he is “open” to keeping policies unchanged in November
  • Philip Jefferson favors a meeting-by-meeting approach to rate cuts, and said the Fed’s balance of risks has changed as inflation has diminished and employment risks have risen
  • John Williams favors lower rates but the timing and pace of future adjustments will be based on evolving data, outlook, and risks
  • Austan Goolsbee noted the “vast majority” of Fed policymakers expect rates will “gradually come down a fair amount to something well below where they are today”
  • Non-voting member Lorie Logan called for gradual rate cuts, said should not rush easing given real upside risks to inflation
  • Non-voting member Lorie Logan added that a more gradual path to policy normalization following September’s 50bps rate cut
• NFIB U.S. Small Business Optimism Index for September 2024: 91.5 (92.0 forecast; 91.2 previous)
• U.S. trade deficit shrank from $78.9B to $70.4B ($70.1 expected) in August as exports (+2.0%) outpaced imports (-0.9%)
• RealClearMarkets/TIPP Economic Optimism Index jumped from 46.1 to 46.9 (47.2 expected) in October
• Headline U.S. CPI for September maintains 0.3% m/m pace (0.2% expected); Core CPI steady at 0.2% (0.1% expected); Annual CPI decelerated from 2.5% to 2.4% (2.3% expected)

Bearish Headline Arguments

• FOMC members support further interest rate cuts
  • Adriana Kugler supports further rate cuts and favors shifting the Fed’s focus from lowering inflation to supporting the labor market
  • John Williams says two more 25bps rate cuts in 2024 is a “very good base case”
  • Susan Collins said “further adjustments of policy will likely be needed” but not on a pre-set path
  • Susan Collins added 0.50% cut was prudent given the risks, adds further adjustments likely needed
  • Mary Daly says one or two more cuts likely this year, shares concerns about labor market
  • Thomas Barkin said inflation is headed in the right direction
  • Non-voting member Neel Kashkari sees neutral Fed funds rate at 3%, balance of risks shifted towards unemployment
  • Non-voting member Alberto Musalem thinks the 50bps rate cut and further gradual reductions are “appropriate” as inflation falls more quickly than initially anticipated
• U.S. Consumer credit slowed from $26.6B to $8.9B in August vs. $11.8B forecast due to higher borrowing costs
• U.S. weekly initial jobless claims in the week ending October 5: 258K (231K expected, 225K previous)
• U.S. Producer Prices Index for September 2024: 0.0% m/m (0.1% m/m forecast; 0.2% m/m previous); Core PPI was 0.1% m/m vs 0.2% m/m forecast/previous
• University of Michigan Preliminary Consumer Sentiment read for October: 68.9 (70.4 forecast; 70.1 previous)

EUR Pairs

The euro demonstrated net strength this week, gaining against most major currencies except for the USD and CHF, despite mixed eurozone economic data and dovish ECB signals.

Key global influences likely affecting EUR:

1. Geopolitical tensions: Early week concerns over Middle East conflict (Hezbollah rocket attack on Israel) likely supported risk-off flows, likely prompting the euro to outperform the risk-on/commodity currencies.
2. Central bank dynamics: ECB members increasingly hinted at an October rate cut
3. China stimulus: Recent announcements of monetary and fiscal support measures from China boosted broad risk sentiment last week, but this week it looks like there is a bit of skepticism of whether it will be enough.  This arguably  influenced broad risk sentiment negatively, again possibly supporting the euro as a “low-yielding” currency vs. the higher-yielders/risk currencies.

Given the generally dovish ECB stance and mixed eurozone economic data, and its strength against commodity and risk-sensitive currencies suggests that global factors (particularly geopolitical concerns and shifting expectations around major central banks’ policies) may have played a larger role than domestic eurozone factors this week.

Bullish Headline Arguments

Bearish Headline Arguments

GBP Pairs

The British pound demonstrated strength this week, outperforming the commodity-linked currencies, while underperforming against the “lower-yielders” and safe havens. This signaled that broad market drivers had more weight on GBP sentiment.

Key global influences likely affecting GBP:

• Middle East tensions: Escalating conflict between Israel and Hezbollah initially boosted safe-haven demand early in the week, likely the driver for GBP’s Monday sell-off (Sterling is generally considered a “risk-on” currency). However, as tensions eased, GBP recovered and strengthened against most currencies, including JPY.
• Central bank expectations: The FOMC minutes and dovish comments from ECB officials suggesting an October rate cut likely supported GBP against EUR and USD. This highlighted the Bank of England’s relatively less dovish stance, despite previous comments from Governor Andrew Bailey last week on potential “aggressive” easing.
• China stimulus: Recent announcements of monetary and fiscal support measures from China boosted broad risk sentiment last week, but this week it looks like there is a bit of skepticism of whether it will be enough.  This arguably  influenced broad risk sentiment negatively, again possibly supporting the pound vs. the comdolls.
• U.S. economic data: Mixed but arguably net negative U.S. inflation and jobs data led to fluctuations in Fed rate cut expectations, causing volatility in GBP/USD, and shifts in FX risk sentiment.

Domestically, positive UK housing data (Halifax HPI, RICS survey) and better-than-expected GDP and manufacturing production figures on Friday likely brought in some fundamental buying for sterling this week. We also got the latest credit conditions survey from the Bank of England for Q3 2024, which signaled an increase in secured credit availability to households, with expectations of stability in Q4. Unfortunately, these net positive updates were not enough to overcome the main broad market themes as these were mostly mid-to-lower tier U.K. economic updates.

Bullish Headline Arguments

• Halifax U.K. House Price Index for September: 0.3% m/m (0.2% m/m forecast; 0.3% m/m previous)
• BRC U.K. retail sales monitor rose from 0.8% y/y to 1.7% in Sept
• RICS: U.K. house prices rose for the first time in nearly two years in September; Respondents expect prices to rise over the next three months
• U.K. GDP for August 2024: 0.2% m/m (0.0% m/m forecast/previous)
  U.K. Manufacturing Production for August 2024: 1.1% m/m (0.9% m/m forecast; -1.2% m/m previous)
• Bank of England Credit Conditions Survey for Q3 2024:
  • The survey showed an increase in secured credit availability to households, with expectations of stability in Q4.
  • Unsecured credit availability saw slight increases, both in Q3 and anticipated in Q4.
  • Demand for secured lending was unchanged, while remortgaging demand decreased but is expected to rise.
  • Corporate credit availability remained stable, though larger firms saw slight improvements.

Bearish Headline Arguments

• Newspaper Guardian reported U.K.’s finance minister Rachel Reeves is considering raising capital gains tax to as high as 39%

CHF Pairs

The Swiss franc demonstrated remarkable strength this week, outperforming all major currencies, as shown in the chart above. Without major catalysts from Switzerland, this robust performance was likely due to the broad risk-off vibes from the major broad market themes.

Key global influences:

1. Middle East tensions: Hezbollah’s rocket attack on Israel early in the week likely boosted safe-haven demand, supporting the franc. The CHF maintained its strength even as tensions eased mid-week, suggesting other factors were at play.
2. China stimulus: Despite announcements of further monetary and fiscal stimulus measures from China throughout the week, which typically boost risk sentiment, the franc continued to strengthen. This suggests that the markets are possibly skeptical if Chinese authorities are doing enough to support weak economic conditions.

Domestically, the improvement in Swiss consumer sentiment from -51 to -37 may have provided some additional support, though global factors likely played a more significant role.

Interestingly, SNB Vice Chairman Antoine Martin’s comments favoring lower interest rates due to low inflation did not seem to weaken the franc, possibly because investors prioritized the currency’s safe-haven status over yield considerations.

Overall, the Swiss franc’s strong performance across the board, even against other traditional safe-havens like JPY, suggesting that global economic uncertainties and geopolitical tensions drove significant demand for the currency, overriding other market factors that might typically weaken it.

Bullish Headline Arguments

Bearish Headline Arguments

CAD Pairs

The Canadian Dollar had a challenging week, ending lower against most major currencies despite some positive domestic data. This weakness was likely driven by a combination of global factors outweighing local influences.

Three key global influences affected the Loonie:

1. Middle East tensions: The conflict between Israel and Hezbollah sparked risk aversion early in the week, initially boosting oil prices. However, as fears of wider conflict eased mid-week, oil prices declined, likely pressuring the commodity-linked CAD lower.
2. Central bank dovishness: The RBNZ’s 50bps rate cut and growing expectations for ECB easing in October may have highlighted the Bank of Canada’s relatively dovish stance. This possibly weighed on CAD as traders positioned for potential rate cuts.
3. China stimulus: Announcements of monetary and fiscal support for the Chinese economy boosted risk appetite recently, but the lack of concrete details initially disappointed markets and oil bulls. This uncertainty and oil’s drop likely contributed to CAD’s mixed performance against other commodity currencies.

Canada did have a top tier catalyst in play this week, and it was a net bullish one for CAD as we saw a better-than-expected employment update (46.7K jobs added vs. 35.0K forecast). The news came on Friday, so it was a bit too late to help out the lagging Loonie, plus it’s only one month of positive news, which of course is not enough for the bulls to get excited on CAD.

Also, the Bank of Canada’s Business Outlook Survey was released a bit later in the session, showing weak demand and slowing price growth expectations, which likely contributed to and capped off a very rough weak for the Canadian dollar.

Bullish Headline Arguments

• Canada Employment Change for September 2024: 46.7K (35.0K forecast; 22.1K previous); Unemployment rate ticks lower to 6.5% vs. 6.6% forecast/previous
  • Canada Average Hourly Wages for September 2024: 4.5% y/y (4.8% y/y forecast; 4.9% y/y previous)

Bearish Headline Arguments

AUD Pairs

The Australian Dollar underperformed against most major currencies this week, with the exception of gains against the Canadian Dollar and New Zealand Dollar. This was despite Australian economic and sentiment survey updates coming in better than previous reads. This was most notable on Tuesday when the Aussie took a dive, correlating with China’s latest stimulus announcement that noticeably lacked details of an actual plan.

But we did see AUD stabilize and recover through the rest of the week, possibly some pricing in of positive earlier economic updates from Australia, including sticky inflation expectations data.

But more likely, it was probably broad risk-on vibes that brought in some AUD bulls through the rest of the week.  This time, it was on another dovish shift in Fed rate cut expectations after weak weekly U.S. jobless claims data and slowing U.S. inflation growth data on Thursday and Friday, as well as an announcement from the People’s Bank of China on stimulus efforts to support the Chinese stock market.

Bullish Headline Arguments

• Melbourne Institute monthly inflation gauge rose by 0.1% m/m in September after a 0.1% dip in August
• NAB: business confidence improved from -5 to -2 in September; Wage growth has passed its peak; Input costs remain elevated
• ANZ job ads gained 1.6% m/m in September, August decrease revised from 2.1% to 1.8%
• Westpac consumer sentiment index improved from -0.5% to +6.2% in Oct
• China’s NDRC announced more stimulus plans but fell short of concrete action on major spending package
• China’s Finance Ministry announced a Saturday briefing to detail fiscal policy changes
• PBOC said it would set up the 500B-yuan Securities, Funds and Insurance companies Swap Facility (SFISF) to help firms pledge assets in return for liquidity
• RBA’s meeting minutes showed members prefer “sufficiently restrictive” policies until they’re more confident on inflation, but are not ruling out cash rate changes
• RBA Deputy Gov. Andrew Hauser thinks the fight against inflation isn’t done yet, rejects the idea that RBA’s minutes was dovish

Bearish Headline Arguments

NZD Pairs

The New Zealand Dollar’s (NZD) performance this week was primarily driven by the Reserve Bank of New Zealand’s (RBNZ) monetary policy decision and its interplay with global market sentiment, which started the week off in risk aversion mode.

First, the week’s key event for the Kiwi was the RBNZ’s decision to cut interest rates by 50 basis points to 4.75%. This move, while expected, signaled the central bank’s commitment to reducing monetary policy restraint as inflation moves closer to target. The rate cut likely dampened demand for the NZD, as lower interest rates typically make a currency less attractive to yield-seeking investors.

Global risk sentiment played a complex role in NZD behavior. China’s announcement of new fiscal stimulus measures recently initially boosted risk appetite, which would typically benefit the NZD as a commodity currency. However, it looks like skepticism on whether it would be enough came in to play early this week after China’s NDRC announced more stimulus plans but fell short of actual details on Tuesday.

FOMC members’ comments supporting further U.S. rate cuts added another layer of complexity. While this usually enhances risk appetite and supports commodity currencies like the NZD, it may have also highlighted the relative dovishness of the RBNZ compared to other central banks, potentially limiting NZD gains.

Domestic data, such as the improved New Zealand manufacturing PMI (rising from 46.1 to 46.9) and increased food price inflation, possibly offered some fundamental support to the NZD rally early in the Friday Asia session, likely complimenting a bullish shift in broad risk sentiment n announcement from the People’s Bank of China on stimulus efforts to support the Chinese stock market and U.S. data supporting an aggressive Fed rate cut narrative.

Bullish Headline Arguments

Bearish Headline Arguments

JPY Pairs

The Japanese yen was a strong outperformer for the week of October 7-11, gaining ground against all major currencies early on and holding on against most by the Friday close.

Given this price action and the string of mixed but arguably net negative economic updates from Japan, it’s highly likely broad market narratives was the bigger driver over Japanese specific sentiment.

On Monday, it was all about geopolitical tensions,  mainly the escalation of conflict in the Middle East, including Hezbollah’s rocket attack on Israel, likely boosted safe-haven demand for assets like the yen.

Those gains stalled and were given back a bit on Tuesday, as traders priced in a vague stimulus announcement from China against ebbing fears of military escalation in the Middle East. The yen continued to trend lower on Wednesday, eventually finding a bottom right around the U.S. session, where Fed members and the FOMC minutes elevated the uncertainty around the Fed’s rate path.

On Thursday, Japanese officials brought out the bulls as some warned against excessive yen weakness, including comments from Finance Minister Kato and currency diplomat Mimura. We also saw Bank of Japan’s Deputy Governor Himino hinting at potential rate hikes as another potential draw for yen bulls.

On Friday, risk-on sentiment was in play after net weak U.S. jobs and inflation updates supported the aggressive Fed rate cut narrative, and more details of stimulus for the Chinese equity markets likely pushed up risk-on sentiment to draw capital away from the yen heading into the weekend.

Bullish Headline Arguments

• Japanese officials warn against JPY weakness and hint at further rate hikes
  • Finance Minister Kato says there are pros and cons to weak JPY, must take action if necessary
  • Currency diplomat Atsushi Mimura said they’ll monitor FX moves including speculative trading “with a sense of urgency”
  • BOJ Deputy Gov. Ryozo Himino favors raising interest rates if the board has “greater confidence” that its forecasts will be realized but said the BOJ is not on a pre-set course
  • Former BOJ member Momma believes USD/JPY in the 150 levels would bring forward the next rate hike
  • Currency diplomat Masato Kanda noted that markets remain “extremely sensitive” to economic developments and the monetary policy outlook in major economies
• Current account surplus expanded from 2.8T JPY to 3.02T in Aug vs. 2.43T forecast
• Producer prices accelerated from 2.6% y/y to 2.8% in Sept (2.3% forecast)
• Reuters Tankan manufacturing sentiment index improved from 4 to 7 in October

Bearish Headline Arguments

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