FX Monthly Update | October 2023

Economic Outlook and Summary

Global markets were feeling frisky in the first half of September as Chinese authorities made another attempt at stimulating economic growth by cutting the Reserve Requirement Ratio (RRR) for all banks by 0.25%. This news was followed by higher than expected industrial production and retail sales. The European Central Bank delivered a dovish rate hike to 4.0%, and the ensuing press conference suggested that it may have been the last hike for this cycle.

The British Pound trended lower throughout September due to a perfect storm of a weak economy, rising budget deficits, and a dovish central bank, which contrasted sharply with the US outlook.

The Bank of Japan stuck to its ultra-dovish monetary policy, and USDJPY has recovered all its losses from earlier when a yield curve control tweak fueled speculation of an imminent policy tightening. USDJPY is closely tracking rising US Treasury yields and setting up probable Bank of Japan FX intervention on a sustained breach above 150.00.

The sentiment continued in the early days of October as bond traders drove the US 10-year Treasury yield to levels last seen in 2008. The Fed has stated that all future rate decisions are “data-dependent,” which means Tier-1 data will roil markets until the next FOMC meeting on November 1

The USD and Federal Reserve

The Fed left rates unchanged at 4.50% on September 20, as was widely expected. However, the economic projections were more hawkish than expected and their implications continue to ripple through the financial markets. released the rate hawks, and the impact from the meeting, continue to reverberate throughout the markets. The notion of another rate hike and the expectation of “higher rates for a longer duration” had a tangible impact, leading to a decline in the S&P 500 index from 4443.95 on September 19 to 4232.68 by October 3.

The US dollar has been on a rampage since the FOMC meeting, with the US dollar index climbing to 106.78 on October 3, from 104.50 pre-FOMC. The US dollar gains are fueled by a stronger-than-expected US economy that continues to create jobs and steady consumer spending, suggesting the Fed may need to raise rates much higher to tame inflation.

The Canadian Dollar and Bank of Canada

The Canadian dollar is struggling. USDCAD found a low of 1.3185 on the last day of July and rallied unabated until reaching 1.3683 on September 8, before a stronger-than-expected Canadian employment report sparked a round of profit-taking. Prices found a floor at 1.3450, then started climbing anew into the FOMC meeting and continued higher in the aftermath. Bank of Canada Governor Tiff Macklem exacerbated the rally when he said, “With past interest rate increases still working their way through the economy, monetary policy may be sufficiently restrictive to restore price stability.” His comments are in stark contrast to the hawkish outlook by FOMC policymakers, which fueled USDCAD gains. USDCAD technicals and fundamentals support further gains with 1.4000 a likely target.

Oil Price

The surge in West Texas Intermediate (WTI) oil prices toward the $100.00 per barrel mark faced a setback in late September. This ascent had been propelled by a combination of factors, including production cuts by Saudi Arabia and Russia. Additionally, forecasts from OPEC and the International Energy Agency had sounded a warning that demand would outpace production, potentially driving prices even higher.

However, this bullish trajectory was interrupted by the concurrent rise in US Treasury yields and the strengthening of the US dollar. These factors pushed oil prices down from their peak. As we look ahead to October, it appears that WTI may consolidate in a $85.00 to $95.00/ band.

Forecast Table 

Forecast Table is for mid-market rates, and subject to change anytime.