The Buck Continues To Plod Higher

WHERE WE STAND – Another relatively quiet day yesterday, in terms of external catalysts at least, though sadly the volume of central bank speakers was anything but quiet, with the 'great and the good’ of the policymaking world waffling away at the annual IMF-World Bank meetings in Washington DC.

As expected, this plethora of policy remarks produced relatively little by way of fresh, or market-moving information. Of the most notable speakers, BoE Governor Bailey made no remarks on the policy outlook, while ECB President Lagarde stuck resolutely to the ‘data-dependent’ stance outlined at last week’s post-meeting press conference.

Still, with growth in both the UK and Eurozone still set to lag significantly behind that of the US – a view reinforced by the IMF’s latest economic forecasts released yesterday – market participants continue to buy in en masse to the ‘US exceptionalism’ narrative.

As such, Tuesday proved to be another day of gains for the greenback, with the DXY rising further north of the 104 figure, and reclaiming the all-important 200-day moving average for the first time since early-August. With little on the cards, in the near-term at least, to change the broader economic outlook, there also seems little likely to stop the greenback in its tracks just yet, particularly with pre-election de-risking, which is likely to ramp up in coming sessions, also likely to spark a degree of haven dollar demand.

The buck’s gains remained relatively broad-based across the G10 FX space, though the continued move higher in USD/JPY continues to catch the eye, with the pair having briefly broken back above the 151 handle for the first time since July. There could well be some pre-election jitters creeping in here as well, ahead of Sunday’s plebiscite, though with the 200-day moving average lurking above at 151.40, the move could well be about to run out of steam.

The common currency also caught the eye, with EUR/USD falling back below the 1.08 figure for the first time since early-August. Given the FX market’s renewed focus on growth, the EUR has relatively little going for it at this juncture, with the bears now likely to be targeting the August lows at 1.0775, before potentially a test of the 1.07 figure were downside to extend further.

Elsewhere, it was a choppy day in the fixed income space, with Treasuries selling off aggressively across the curve early doors, before paring losses as trade progressed. Some, again, pinned the early selling pressure on the supposed ‘Trump Trade’, though I’d instead argue that the recent pressure in the Treasury space is more a reflection of more positive longer-run growth expectations, particularly with Citi’s economic surprise index at its highest level since April.

If one is seeking a ‘Trump Trade’, the buying vol is where I’d be looking. One-month USD/MXN implieds, for instance, are still some way off the pre-election peaks from 2020, and 2016, with substantial further upside likely here if the perceived likelihood of a Trump victory further increases. This is in contrast to the Treasury complex where we are likely not far off a level – 4.2% in 10s, 4.5% in 30s – where such a juicy yield proves too attractive to resist, and sees buyers enter the fray once more.

Buyers did indeed enter the Treasury space yesterday, albeit only on an intraday basis, with early losing paring almost entirely as stocks lost ground around the US cash open, a helpful reminder that it’s not just one-way traffic in the bears’ favour in the FI arena. Nevertheless, major indices pared those declines as the session went on, with dip buyers out in force again, and the path of least resistance continuing to lead to the upside.

Gold, in contrast, gained ground once more, notching fresh all-time highs in the spot market, with recent upside momentum continuing. Whatever the catalyst, said momentum appears as solid as ever, with short gold positions right now very much akin to picking up pennies in front of a steamroller.

Lastly, I spare a thought for any Canadian readers out there because, guess who’s back…it’s only the ‘Unreliable Boyfriend’ himself, Mark Carney! In a recent podcast, Carney touted his plans to enter the political fray, just as the Liberal party seek to oust Prime Minister Trudeau, ahead of elections that must be held by this time next year. To be honest, these political ambitions have been rather obvious since ‘day dot’, and undoubtedly skewed Carney’s commentary and policymaking judgement during his days at the BoE. Still, given his rather loose commitment to forward guidance in the past, perhaps these political ambitions will go the same way as his BoE term, and be cut short. That old moniker might yet ring true yet again!

LOOK AHEAD – Another relatively quiet data docket ahead today, lacking top-tier releases.

This afternoon’s Bank of Canada decision may attract some interest though, with consensus leaning strongly towards a 50bp cut, to 3.75%, and the CAD OIS curve discounting around an 80% chance of such action. Focus will fall not only on the decision itself, but also the BoC’s forward guidance, particularly with money markets pricing an even chance of another 50bp cut at the December meeting, leaving the bar for a dovish surprise as a relatively high one. USD/CAD overnight implieds trade at 5.59%, the highest level into a BoC meeting in twelve months, implying a move of +/- 75 pips over the tenor, to one standard deviation of confidence.

Elsewhere, today, neither the US existing home sales, nor the eurozone consumer confidence figures are likely to move the needle especially much. The same can be said of the aptly-named Fed ‘Beige Book’ due tonight, as well as the plethora of central bank talking heads, almost all of whom are likely to repeat recent remarks, reiterating a data-dependent stance.

On the earnings front, another busy day awaits, with the likes of Boeing, AT&T and Coca-Cola reporting before the open, followed by IBM, and TSLA – the first of the ‘magnificent seven’ to report – after the closing bell tonight. TSLA options imply a chunky +/- 7.3% move in the stock after the report, though the last 3 earnings reports running have resulted in double-digit percentage swings.