Greenback dragged lower by questions of the AI meme

The US Dollar is finishing the week offered.  The proximate cause is the arguably softer rates and the as a result of new questions about the AI-meme, following the disappointing Amazon and Intel earnings news and guidance yesterday. This followed the robust Q3 US GDP report that underscore the significance of AI-related investment is fueling US growth (alongside consumption).  The eurozone reported stronger than expected Q3 GDP but the pressures in the European peripheral bond market have not gone away.  This week, the French 10-year premium is slightly more than six basis points wider, and the Italian premium has widened by about five basis points. At the same time, front month Brent and WTI futures contracts are at new highs. December WTI approached $105 and January Brent poked above $114. 

The Bank of Japan completed this week’s central bank meetings, and as widely expected, left the overnight target at 1.25%.  Like the Federal Reserve and the European Central Bank, the Bank of Japan is widely expected to hike rates in December. Five G10 central banks met this week and four more meet next week.  The Reserve Bank of Australia and the Bank of England are most likely to hike.  Norway’s Norge Bank is expected to stand pat, while Sweden’s Riksbank is the closest call and the swaps market favors a hike.

Prices

G10

The Euro rallied from a marginal new low for the year near $1.11 in the North American morning and reached almost $1.1185 in late turnover. It settled firmly (above Wednesday’s high). Technically, it posted a key upside reversal. It held mostly above $1.1175 today, and follow-through buying today lifted the euro to $1.1215, a four-day high. The week’s high, set Monday, was a little above $1.1225.  Options for 3.6 bln euros expire today at $1.12.  

The Dollar traded mostly sideways against the Japanese yen yesterday.  It spent most of the session in about a quarter a yen below Wednesday’s settlement (~JPY157.85), and slightly less than a third of a yen above it. The dollar returned to session lows in late turnover after the reaction to Intel’s and Amazon’s earnings and guidance.  The dollar was sold to almost JPY157.10 a four-day low, around the BOJ’s standpat announcement. It has not been above JPY157.45 in Europe. Options for $1.3 bln at JPY157 expire Monday. 

After having been sold to an eight-day low, slightly below $1.3275 on Wednesday, sterling caught a bid yesterday that lifted it to $1.3385. The dollar’s broad weakness boosted sterling slightly above $1.3430 today. It frayed the 200-day moving average, which is found around there, for the first time since mid-September. The next hurdle is seen in the $1.3470 area. Sterling is at a new high for the year against the euro.  The euro fell to almost GBP0.8335 today.  That is its lowest level since April 2025. UK 10-year Gilt yield fell a little more than three basis points yesterday. It settled below 5.30% for the first time since Sept 22.  

The Canadian dollar strengthened yesterday, and Canada’s two-year discount to the US narrowed. It is below 130 bp for the first time since mid-September. The greenback tested Monday’s low (~CAD1.3965), which is also the (61.8%) retracement objective of the rally from the September 8 low (~CAD1.3760).  However, as the markets responded to Intel’s news, the US dollar recovered back to CAD1.3990. Still, the US dollar is trading with a heavier bias and is pressing below CAD1.3960 in European turnover today. A convincing break could signal a near-term move toward CAD1.39.  The 200-day moving average is a little below there now but gently rising. 

The Australian dollar underperformed yesterday. It was the weakest among G10 currencies and gave back a little more than half of Wednesday’s 0.40% gain.  It traded on both sides of Wednesday’s range but settled within, and a little below last week’s close, which was slightly above $0.7035. It is consolidating today in the lower half of yesterday’s range. Options for A$1.1 bln at $0.7025 expire today. 

EM 

After consolidating in the previous four sessions, the Mexican peso took another leg lower yesterday amid the broad decline of Latam currencies. The dollar rose to a new high for the year, a little above MXN18.89 and poked above MXN18.90 today. The next technical target is in the MXN19.00-MXN19.07 area. 

The offshore yuan reached its best level against the dollar since June 2022 today, slightly below CNH6.65.  It has been 12 sessions since the yuan.  The dollar is off around 0.85% this month, its largest monthly loss since May. Our CNH6.60 target is coming into view. The PBOC set the dollar’s reference rate slightly lower today (CNY6.7138 vs. CNY6.7147 yesterday. The Sept 30 fix was at CNY6.7351. Note that by switching policy rates from the seven-day benchmark that was at 1.4% to the overnight reverse repo rate, announced today at 1.25%, which looks like the easing of policy. 

India moved in the opposite direction.  It announced an 81 bp increase in the floating rate (2034) bond. The Indian rupee rose by almost a third of 1% today, its biggest advance of the week.  Still, the dollar settled near INR94.9550 compared with INR94.9425 a week ago. Yet, the monthly advance of around 0.9% is the best monthly performance since February.  

Other markets

US equity indices traded heavily yesterday. The Nasdaq Composite settled slightly below opening levels while the S&P 500 settled slightly above.  Today’s action was sparked by investors selling Amazon and Intel shares after their earnings and guidance, and this weighed on tech stocks today in the Asia Pacific region.  Most bourses in the region fell. Japan’s Nikkei 225 was off 2.1%, Taiwan’s Taiex fell 2.5%, and South Korea’s Kospi dropped 3.5%.  Hong Kong, Australia, New Zealand, and India were notable exceptions. Europe’s Stoxx 600 is falling for the first time this week.  It is off about 0.25% so far today.  The Nasdaq 100 futures are off around 2.3%, and S&P 500 futures are ~1% lower. 

Benchmark 10-year yields softened in North America and Europe yesterday. Two things stood out in Europe.  French bonds underperformed in a falling rate environment. Second, UK Gilts were off almost 3 bp, with the yield ending yesterday at its lowest close since September 22. However, the two-year yields decline even more (bullish steepening) and there French premium over Germany narrowed by a couple of basis points. France pays about 50 bp more than Greece and almost 15 bp more than Italy to borrow for two years.  European rates are mostly lower, with France (up 3 bp) and Italy and Greece (up almost 2 bp) are the laggards.  The 10-year US Treasury yield moved a few basis points higher in the run-up the GDP release.  The yield pulled back a few minutes after the release and trended lower to 4.93%, a marginal low for the month, in late dealings after the equity news.  It is still there now. 

Lower interest rates did nothing to lift the spirit in the bullion market.  Gold, which tested $4082.50 on Wednesday was back within a stone’s throw of $4000 (~$4007) in the North American afternoon. It made a new three-month low today near $3965. Since the low was made, gold has not been able cover back above $4000.  Silver was tagged for around 3.5%. It has dropped by more than 12% in the seven sessions through today and is down more than 16% for the month. It traded below $50.50 for the first time since last November. 

December WTI consolidated yesterday inside Wednesday’s range (~$99.75-$103.55). With today’s gain to almost $105, the contract is up about 17.8% this month.  According to AAA, average retail price of unleaded has fallen by about 20 cents a gallon this month through yesterday. It rose by about 7.8% in September.  

Data

The US finishes the week with Q3 Employment Cost Index.  It includes direct costs, such as wages, salaries, and bonuses, and indirect costs benefits, such as Social Security contributions, taxes, and training costs. The four-quarter moving average peaked in 2022 at 1.25% and has slowed to 0.82% for the past three quarters.  Many Fed officials acknowledge that labor costs are not contributing significantly to the price pressures.  

StatCan is expected to report that the Canadian economy expanded by 0.2% in August after a flat performance in July. That would be sufficient to lift the year-over-year pace to 1.7% from 1.4%.  

Mexico reports Q3 GDP.  The economic momentum likely slowed after the 1.4% quarter-over-quarter expansion in Q2.  If that is accurate, the year-over-year pace would have quickened to 3.0% from 2.1%. That would be the fastest growth since Q3 23. 

For its part, the eurozone growth slowed in Q3.  The quarter-over-quarter pace was 0.4%, which is better than the 0.2% expected after it expanded by 0.6% in Q2.  The year-over-year pace ticked up to 1.3% from 1.2%. Of note, the French economy unexpectedly contracted by 0.1%Separately, Germany, France, Italy, and Spain reported preliminary October CPI figures. German (states) and Spain saw less price pressures while France and Italy reported the year-over-year pace quickened. 

Australia’s private sector credit expanded by 0.6% in September, which matched the August increase. The year-over-year rate was steady at a robust pace of 8.4%. After the hawkish comments and firm CPI, the market will head into next week with around an 80% chance of a hike discounted, up from almost a 65% a week ago.   

The Bank of Japan left its overnight rate at 1.25%.  The swaps market has about a little more than an 80% chance of a December hike priced.  The BOJ updated its forecast.  GDP this year is seen at 0.7 (vs.0.6%) and 0.7% next year (from July’s projection of 0.8%). Core CPI (excludes fresh food) is forecast for this year held steady at 2.5%, and next year’s stands at 2.6% (from 2.4%). Separately, Tokyo’s October headline CPI edged up to 2.8% from 2.7% while the core rate slipped to 2.6% from 2.7%. September retail sales surprisingly fell by 0.7% after falling a revised 0.9% in August (initially -1.2%). The preliminary September industrial production bounced back a stronger than expected 2.2% after falling 2.4% in August. Lastly, the unemployment rate slipped to 2.4% in September from 2.5%.

China will report its October PMI first thing tomorrow.  It is expected to have slowed, and the median forecast in Bloomberg’s survey projects the manufacturing PMI to slip below the 50 boom/bust level where it had been in July and August before rising to 50.1 in September.