FX Update: Volatility pick-up is there, if sluggish and patchy.

In Japan, LDP chooses the “safe” candidate: The race for the LDP leadership is over, with the favourite among party leaders, Fumio Kishida, prevailing in a run-off versus the more outspoken, and far more popular Taro Kono, who would have been more interesting as someone who has spoken out against Abenomics and BoJ policy. This sidelines the potential for more policy dynamism for now in Japan as Kishida is seen as the “continuity” candidate. The JPY has firmed smartly today more as a function of consolidating bond yields rather than the implications of this vote, as we await further political signals up to the snap election set to take place within two months.

US Senate to try advancing stop-gap funding measure to avoid government shutdown: US Senate set to vote today on stop-gap bill for temporary debt ceiling suspension until Dec. 3 - this time, the bill will not be attached to an increase in the debt ceiling, but would still leave unanswered whether Congress can manage to eventually raise the debt ceiling and pass the two outstanding spending bills – the smaller infrastructure packaged passed by the Senate but not by the House and the larger $3.5 trillion social- and climate package.

China keeping CNH very firm: given the policy uncertainties in China that are leading to fears of weaker growth ahead and reduction of international allocations to Chinese equities, one would think that the CNH should trade weaker than it has, particularly as the US dollar has been very firm and the CNH has historically been allowed to weaken, if with lower beta relative to other currencies, versus the USD when the latter is strengthening. Perhaps China is holding up the currency out of a general desire for stability amidst the significant market turmoil of late and at the margin, to avoid even worse inflationary impact from high import prices for commodities as it tries to shore up energy stocks ahead of the winter heating season. For whatever reason, the lack of USDCNH is likely contributing a significant damper to overall FX volatility. USDCNH 3-month implied volatility is trading just above 4% and thus in the lower part of the of the multi-year range.

Table: FX Board of G10 and CNH trend evolution and strength
What stands out above all else recently is the CNH’s slavish tracking of the US dollar, given the latter’s notable strength of late, as noted above. The chief development of note elsewhere is the acceleration, if still modest, in the US dollar higher and the pronounced sterling weakness. Commodity currencies are sideways on the tension between the negative drag from risk sentiment while rising prices are a positive.

Table: FX Board Trend Scoreboard for individual pairs
Note the still low volatility levels for most currency pairs (the shading of the ATR indicates low volatility if light blue or especially darker blue). Also note USDCAD possibly flipping back higher here, while GBP weakness is so pronounced that it has even flipped negative versus the also weak JPY.

Upcoming Economic Calendar Highlights (all times GMT)

• 1200 – ECB's Guindos chairs ECB forum session
• 1300 – US Fed’s Harker (non-voter) to speak
• 1430 – EIA's Weekly Crude Oil and Fuel stocks report
• 1430 – ECB Chief Economist Lane chairs ECB forum session
• 1545 – US Fed Chair Powell, BoE Governor Bailey, ECB President Lagarde, BoJ Governor Kuroda in ECB forum panel session
• 1700 - US Fed’s Daly (voter) to speak
• 2350 – Japan Aug. Industrial Production
• 0100 – China Sep. Manufacturing and Non-manufacturing PMI
• 0130 – Australia Aug. Building Approvals
• 0145 – China Sep. Caixin Manufacturing PMI