We remain cautious of the greenback’s recovery after the DXY Index’s 3.9% rise in the past four weeks. With the Fed in a pre-FOMC blackout, weaker US nonfarm payrolls this Friday could reinvigorate expectations for two Fed cuts in November and December. US initial jobless claims have risen on a 4-week moving average basis to 239k for the week ending October 18, the highest since early August. Consequently, nonfarm payrolls may fall below 200k, reversing September’s unexpected rise to 223k, which triggered the USD’s recovery and the rise in US bond yields this month.
The “Trump Trade” that lifted the USD could lose momentum ahead of the US Presidential Election on November 5, mirroring a similar loss 1-2 weeks before the 2016 election. The race between Vice President Kamala Harris and former President Donald Trump remains too close to call. However, according to NBC News, early votes showed Harris leading in Pennsylvania, Michigan, and Wisconsin – the three critical swings states in the 2016 and 2020 elections. Additionally, the DXY’s post-election rally in 2016 was also fuelled by the onset of a Fed hiking cycle in December 2016, a stark contrast to today’s scenario, where the Fed began a rate-cutting cycle last month.
The JPY started weak on Monday amid post-election uncertainties and doubts over BOJ policy. Prime Minister Shigeru Ishiba, who triggered this month’s JPY sell-off with his comment about Japan’s unreadiness for rate hikes, will have difficulty hanging on to power. Exit polls indicated that the ruling coalition led by the Liberal Democratic Party (LDP) would lose its parliamentary majority in the October 27 snap elections. Ishida, who has 30 days to find a third coalition partner, will likely face pressure to resign. JPY bears hope that Sanae Takaichi, a strong advocate of ultra-low interest rates, will succeed him. Meanwhile, the opposition Constitutional Democratic Party will also be looking to form another coalition to form a government.
The Bank of Japan is expected to leave rates unchanged at its meeting on October 31, following the decline in Tokyo’s CPI inflation below the 2% target in October. But it should maintain its monetary policy normalization plan to hike rates through 2025. The largest labor union group, Rengo, has announced plans to seek wage hikes of at least 5% in 2025, matching this year's increase. Markets will view interventions as opportunities to buy USD/JPY but they should also be wary of the USD’s downside risks on a weaker US payrolls report this Friday.
GBP/USD traded below 1.30 last week but found support at a trendline of around 1.29. The UK Autumn Budget 2024 announcement on October 30 has attracted attention. Chancellor of the Exchequer Rachel Reeves has flagged some GBP40 bn of tax hikes and spending cuts to plug a GBP22 billion fiscal “black hole” by the previous government. The IMF has given implicit support to relax the self-imposed fiscal rule to unleash public investment, namely in infrastructure, to achieve long-term growth. Hence, the market does not expect a repeat of the mini-budget crisis, especially now that CPI inflation fell to 1.7% YoY in September, below the 2% target for the first time since April 2021. The OIS market has priced a 25 bps cut in the Bank of England’s bank rate to 4.75% at its next meeting on November 7.
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