Exponent of Broadbased Dollar Weakness is USD/JPY

Markets

The US Treasury’s $16bn 20-yr Bond auction stopped a full bp though the 1:00 PM bid side and provided a new boost to the Treasury rally. Especially after the lackluster 30-yr Bond sale earlier this month. Investors snapping up longer term US debt is both testament to market belief in the Fed’s soft landing scenario and indifference on deteriorating public finances for the moment. Indirect bidders took home 74% of the volume, which was the most since June 21. This mainly represents foreign interest (eg central banks), but also domestic money managers placing bids through primary dealers. The auction bid cover was 2.58, the lowest in three months and well-below the 1y average, but markets turned a blind eye to this detail. Daily changes on the US yield curve ranged between -0.6 bps and -3.9 bps after Treasuries recovered from early losses. The US 10-yr yield closed just above 4.4%, closing in on 4.34% support (38% retracement on this year’s rise). Traded volumes remained relatively low for a third session straight. The auction results pushed US stock markets 0.6% (Dow) to 1.1% (Nasdaq) higher as well. The S&P closed at its highest level since August, with the 2023 high being within reach (4607 vs 4547). The technical picture for Nasdaq looks similar with the 2023 top at 14447 vs 14285 close. The trade-weighted dollar (DXY) slipped below the 50% retracement level on the ascent from mid-July to early October (103.46) with 62% retracement standing at 102.55. EUR/USD is already testing that 62%-reference at 1.0960. The exponent of broadbased dollar weakness is USD/JPY, with the pair drifting further away from 150+ levels (147.50). Today’s eco calendar is extremely thin with Minutes of the previous Fed meeting and ECB comments the sole highlights. They aren’t expected to change the underlying market drift.

Bank of England governor Bailey in a speech delivered to the National Farmers’ Union after European close, said that the UK central bank was “on watch for further signs of inflationary persistence that may require interest rates to rise again”. It’s too soon to be thinking about rate cuts with services inflation being much too high and wage growth still elevated. He also mentioned upward inflation risks ranging from global economic fragmentation (prioritization of local markets when supply fails), events in the Middle East via energy prices and the cost of food production and climate change (food prices). Bailey’s comments had no direct impact, but if any managed to halt sterling’s decline. EUR/GBP yesterday closed back below 0.8750 from a start at 0.8762. Bailey testifies to UK Parliament later today.

News & Views

News agency Bloomberg had an early peak into the European draft assessments of the 2024 national budgets, which is scheduled for release later today. It reported that France risks being put on the European Commission’s watch list for ignoring the bloc’s fiscal rules, joining other potentials including Finland, Croatia and Belgium. Germany and Italy are deemed not fully compliant, as are (amongst others) The Netherlands, Portugal and Slovakia. It’s the first time since the pandemic the EC is about to issue this assessment. Fiscal rules, which limit deficits to 3% of GDP, up to 2023 were suspended in the wake of Covid-19 and the energy crisis. The period in between has been used to rework the rigid framework but lacking a general consensus from member states means the old rules kick back in next year. Being on the list has no immediate consequences. It is up to the Commission to decide later whether or not it triggers the so-called excessive deficit procedure if countries at risk fail to correct the situation.

The Reserve Bank of Australia had discussed a fifth consecutive pause for the November meeting, the minutes revealed, but opted for a hike to 4.35% instead. Policymakers noted that the risk of not achieving the 2-3% inflation target had increased. Forecasts showing that goal reached by end 2025 were based on one or possibly two more rate rises, the minutes said. Australian money markets only attach a 30% probability to another hike to 4.6%. There’s a low tolerance level in general vs too high inflation with the minutes citing a scenario where “even a modest further increase in inflation expectations would make it significantly more challenging and costly to return inflation back to target within a reasonable timeframe.” In other words: a hike now is needed to prevent more aggressive tightening later. The Aussie dollar this morning briefly rose to the highest level since August on USD weakness before paring gains again. AUD/USD is currently trading around 0.656.