The FX market seems to be recovering from yesterday’s stall

Outlook

The Challenger Gray report this morning is the latest edition to the private sector labor market news, and it’s not good news. “US employers dialed back hiring plans in September and announced fewer job cuts.” Jobs to be added in Sept were a measly 117,313, down 71% y/y and the worst since 2011.

“From January through September, US-based employers announced plans to add nearly 205,000 jobs, the weakest year-to-date stretch since 2009. Meanwhile, firms announced plans last month to cut 54,064 jobs, down almost 26% from a year ago and fewer than the 85,979 announced in August. Planned cuts don’t necessary translate into immediate layoffs.”

“So far this year, employers have announced plans to cut 946,426 jobs, the highest for any comparable period since 2020 during the pandemic. Reductions have been most notable in government, including more than 289,000 related to cost-saving efforts by the Department of Government Efficiency (DOGE).”

Together ADP (loss of 32,000 jobs in September) and Challenger have put the Fed on full alert, especially with those 150,000 buy-out federal employees now on the street. The Oct rate cut is practically a dead cert, almost without regard for whatever inflation data we get. 

As of yesterday morning after the ADP release, the CME FedWatch tool has a 99% probability of a Fed rate cut at the Oct 29 meeting, from 91.9% a week ago.

Forecast

The FX market seems to be recovering from yesterday’s stall. With US yields receding and the government closed down, the administration is grabbing the opportunity to make politically motivated spending and job cuts. The labor market is tanking. Sentiment is grim. There is not a single reason to favor the dollar.

Granted, some currencies have their own issues unrelated to the US. The UK is in a fiscal nightmare it can’t fix. The Economist magazine recently suggested the PM just give up and resign.  Canada is looking forward to a decently robust Q4 but the CAD persists in falling. Japan is probably the most capable to setting fires with its upcoming election. Elections shouldn’t shove central bank policy but sometimes do, and this is a prime example. We read reams about the election but honestly, the Japanese mindset is very different from ours, as WolfStreet points out (and he really does know). At a guess, the voters are up for a real change. What this means for the yen is anyone’s guess, but whatever it turns out to be, the carry trade may be in for some shocks.

Food for Thought: Every night when we do the charts, we look at the euro/CHF and wonder what is going on. Now we have some explanations from Reuters. 

Yes, the SNB has been intervening, but against the Swiss franc getting too strong against the euro. It’s leaving the USD/CHF alone, and by formal agreement with the US government this week:

In an extraordinary joint statement this week, the SNB, the Swiss Finance Ministry and the U.S. Treasury reconfirmed that they do not target exchange rates for competitive purposes. The statement "confirms that foreign exchange market interventions are an important monetary policy instrument for the SNB in ensuring appropriate monetary conditions and thus meeting its statutory mandate with respect to price stability."

Trump threw another monkey wrench into the trade war with the 100% tariff on pharmaceuticals—which are the biggest Swiss export to the US by far—$30 billion of a total $44.35 billion. Not to mention his ridiculous TrumpRx initiative. Do you buy anything from a guy who lies many times a day?

“The balance sheet readout showed the euro's share of Swiss reserve assets, opens new tab has now risen above the dollar stash for the first time since 2020 - with the euro at 39% and the dollar at 37%. … The SNB's trade-weighted currency basket shows the euro has a commanding 42% share but the dollar is only 14% - so there is ample room for further rebalancing of its reserves to match that.”

Reuters wonders whether other central banks will take a leaf from the SNB book. The IMF says central banks hold almost $13 trillion of hard currency worldwide and 56% remain in dollars.

Tidbit: Did it have a soothing effect on the dollar yesterday? Nobody knows. The Supreme Court declined to let Trump fire Fed Gov Cook for the moment and will take up the case in January. SCACO (Supreme Court always chickens out).

Reuters reports “Since Trump returned to office on January 20, the court has acted in 23 cases on an emergency basis involving his policies, siding with him fully or partially 21 times, with one case declared moot.”

Tidbit: Bloomberg writes “Barely a week after Argentine assets surged on a vow from Bessent to provide “all options for stabilization,” traders Tuesday drove the Argentine peso down over 6% against the dollar — forcing Milei’s government to intervene and stem the plunge, only for it to fall again Wednesday and prompt further dollar sales by officials.

“The capacity of Buenos Aires to keep up such efforts on its own is limited by its lean foreign exchange reserves, putting a spotlight on what Washington is prepared to do.

“There’s a sentiment things can’t hold at this pace,” said Hans Humes, the chairman of Greylock Capital Management, who has more than three decades of experience with emerging markets. “The selling is led by locals, and dealers and investors here aren’t going to stand in the way,” New York-based Humes said.”

Republicans are not all behind bailing out Argentina when it’s benefitting from soybean sales to China at the expense of US farmers.

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