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Hello everyone, today XM Forex will bring you "[XM Forex Official Website]: September CPI strengthens expectations of interest rate cuts, but the US dollar relies on risk aversion to support the shock!". Hope this helps you! The original content is as follows:
Last Friday, lower-than-expected CPI data boosted market interest rate cut expectations. The U.S. dollar index fell in the short term and then rebounded slightly. As of now, the U.S. dollar is quoted at 98.96.
U.S. CPI - ① U.S. CPI in September was lower than expected across the board, and traders are betting that the Federal Reserve will cut interest rates twice more this year. ② Hassett, director of the White House National Economic Council: The data is "excellent", inflation is slowing, and the pressure on the Federal Reserve has eased. ③The U.S. White House: It may not be possible to release inflation data next month for the first time in history.
The United States dispatches the USS Ford aircraft carrier strike group to the Caribbean.
Trump: The stock market is stronger than ever because of tariffs.
According to Nikkei: During US President Trump’s visit to Japan, Japan and the United States will sign a memorandum of understanding on technical cooperation.
Takaichi Sanae held its first telephone conversation with Trump.
U.S. Senator: After his trip to Asia, Trump will hold a briefing in Congress on the possible expansion of attacks on Venezuela.
Trade Agreement - ① The United States and Thailand signed an agreement on key minerals and will maintain 19% tariffs on Thailand; ② Trump and the President of Brazil will meet, and the two sides will conduct economic and trade negotiations, and Brazil requires the suspension of tariffs during the negotiation process; ③ The United States and Malaysia signed a trade agreement and a critical minerals agreement; ④ The United States and Vietnam announced a framework for reaching a reciprocal, fair, and balanced trade agreementand will maintain a 20% tariff on Vietnam. ⑤ Dissatisfied with Canada’s anti-tariff advertisement, Trump announced an additional 10% tariff on Canada. The United States announced the termination of all trade negotiations with Canada; Canadian Prime Minister Carney said he is ready to restart trade negotiations when the United States is ready.
Bank of America cited EPFR data: Gold funds recorded the largest weekly inflow in history in the week ending last Wednesday; annual inflows of gold and bonds may hit record highs.
European rating agency Scope downgraded the U.S. sovereign credit rating to AA-.
Moody's lowered the outlook on France's sovereign credit rating to negative.
Multiple Palestinian factions agreed to establish an independent technocratic agency to govern the Gaza Strip.
Pakistan and Afghanistan held the second round of ceasefire talks in Türkiye.
Cambodia and Thailand signed a joint peace declaration in Malaysia.
The risk of upward inflation is receding, while concerns about the job market are increasing. The Federal Reserve is expected to cut interest rates by another 25 basis points this week and may end its quantitative easing policy. However, we believe that the US dollar is currently more sensitive to economic data than the Fed meeting itself. A data vacuum during the government shutdown briefly supported dollar strength - a lack of data meant it was difficult to speculate on the likelihood of further easing. However, the foreign exchange market subsequently fell into a disorientation, and the final non-agricultural data released is likely to have more influence on the trend of the US dollar than the October meeting.
Looking back on the situation in September, the Fed's interest rate cut, which was fully centrdom.infomunicated in advance, triggered a strong rebound in the US dollar. However, the current market position distribution is more balanced, and the probability of repeating this kind of market is low. However, considering that Powell may once again show caution when assessing the inflation and employment situation, the dollar still faces an upward balance of risks on the day of the Fed meeting. However, unless the Fed sends a clear hawkish signal, the dollar rally triggered by the meeting day is not expected to last. Once regular economic data releases resume, the flow of centrdom.information is likely to re-point to a weaker dollar, especially in the seasonally weak year-end phase.
This Fed meeting will focus on liquidity management. The current scale of bank reserves is slightly less than 3 trillion US dollars (about 10% of GDP). Although it is in the centrdom.infofort zone, the Fed wants to ensure sufficient buffers. Historical experience shows that when the reserve ratio drops below 7% (the repurchase market was turbulent in 2019), moderate corporate tax payments can trigger violent fluctuations in the capital market. In order to ensure that the reserve ratio is no less than 9%, the Fed can also tolerate a reduction of about US$300 billion.
Treasury debt is currently shrinking by approximately US$5 billion per month, and MBS has actually shrunk by approximately US$15 billion (below the US$35 billion upper limit), for a total monthly shrinkage of US$20 billion. according toAt this rate, buffer space will be exhausted within a year. In this regard, the Fed may take the following paths: ① centrdom.infopletely stop the reduction of Treasury bonds; ② Either tolerate the retention of its balance sheet for the $2 trillion MBS position, or increase its holdings of Treasury bonds or treasury bills while maintaining the reduction of MBS (the latter can avoid being interpreted as quantitative easing). However, the impact of this meeting on the government bond market is expected to be limited. As long as inflation data is under control, the yield curve may remain stable. Given the Fed's focus on economic vulnerabilities and its "End QT" plan, the Treasury market is expected to remain stable.
We expect the Bank of Japan to keep the policy rate unchanged at 0.5% at its next monetary policy meeting on October 29-30. Market expectations for a rate hike in October had increased after two policy centrdom.infomittee members unexpectedly proposed a rate hike at the September 18-19 meeting. However, as the Liberal Democratic Party leadership election on October 4 disrupted the domestic political landscape, expectations for an interest rate hike in October have fallen sharply. Although the prime minister election has concluded smoothly, given the continued domestic political uncertainty and the difficulty in assessing the U.S. economic situation during the government shutdown, we expect the Bank of Japan to remain on hold at its October meeting.
Even if the Bank of Japan keeps interest rates unchanged as expected, we believe it will send a hawkish signal to prepare for the next interest rate hike. The Bank of Japan is expected to slightly raise its GDP growth forecast for fiscal year 2025 based on data from the past three months, but the forecast for fiscal year 2026-2027 will remain basically unchanged. A more important focus is on the wording of economic and inflation expectations and risk assessments in the meeting statement - any wording revision that hints at a slowdown in the pace of growth or underlying inflation, or that "remains a high degree of uncertainty" in domestic and foreign economic activity and prices, may be regarded as an important signal towards the next interest rate hike. If policy members other than Takada Hajime (who advocated an interest rate hike at the September meeting) also expressed support for an interest rate increase, it would also send a clear message that the central bank is close to raising interest rates. Even if the above adjustments do not occur, we expect that Governor Kazuo Ueda will respond to the recent rise in inflation expectations by placing more emphasis on underlying inflation and upward price risks at the post-meeting press conference. The market is likely to interpret this as the central bank paving the way for the next rate hike.
The U.S. and Japan are currently trading around 153, reflecting the overall strength of the U.S. dollar and the general market expectation that the Bank of Japan will not raise interest rates at the next meeting. Japan's CPI data released in the morning showed an increase in energy inflation. This is because the large-scale energy subsidies in the same period last year have withdrawn from the statistical base. At the same time, service industry inflation also fell slightly. Overall, this set of data will not put additional pressure on the Bank of Japan to raise interest rates. This morning, Takaichi Sanae gave a policy speech. Although the Japanese bond market remained stable, she emphasized "responsible and proactive fiscal policy" which further strengthened the trend of moderate weakening of the yen.
The Japanese yen remains in a weak range, while international crude oilThe sharp rise in prices further exacerbates the negative sentiment towards the yen in the short term. Japan's high dependence on imported energy prompted importers to increase dollar trading. In addition, if oil prices continue to rise, it will push up inflation expectations, thereby lowering Japan's real interest rates, further strengthening the "BoJ behind the curve" trading logic, that is, the steepening of the Japanese government bond yield curve parallels the depreciation of the yen. There may be strong political opposition to a weak yen ahead of Trump's visit to Japan. However, given that the Bank of Japan is widely expected to maintain its current policy next week, the impact of pure remarks is expected to be limited. All in all, we currently do not believe that the USJPY can continue to stand above the 155 level.
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