FX Update: Crisis coming if rise in US yields persists.

Sterling is adrift against more than just the strong US dollar, falling so new seven-trading day lows versus the Euro toady, but really needing to retake the pivot highs above 0.8860 to suggest that isolated sterling weakness has returned to the agenda. Again, the fiscal tightness into a vicious cost-of-living crisis will mean that the Bank of England can only take rates so high, and the currency could continue to suffer for the foreseeable future, regardless of the identity of the next hapless leader that will replace Liz Truss.

The week ahead
Next week sees a Bank of Canada meeting on Wednesday. After the hot CPI print for September, the Bank of Canada will have to match the Fed rate hike pace of 75 basis points, which is mostly priced in now (they have been more dynamic, willing to hike 100 bps in July to play some catchup with reality. The Bank of Canada is seen as losing its tightening momentum relative to the Fed after the meeting next week, but that may be unlikely as long as CAD weakness continues adding to inflation risks. Still, private debt leverage is far higher in Canada and more quickly sensitive to rising rates (mortgages generally based on 5-year rates), so economic weakness may set in earlier in Canada. Any more profound support for CAD will likely require either a change in direction from the Fed/US yields and/or new narrative around energy prices will be needed for CAD to find new support.

Also up next week: flash Eurozone PMIs for October on Monday, with the ECB meeting on Thursday  set to deliver 75 basis points, but perhaps hoping to get away with not guiding too strongly for future meetings (market divided on whether December delivers a 50- or 75-bp move). The QT talk will only pick up in earnest in December, with the ECB doubtless hoping that the cycle will end before it ever has to do QT. Other bits and pieces include Australia’s Q3 CPI on Wednesday, the first estimate of US Q3 GDP on Thursday and US September PCE inflation data and final Oct. University of Michigan inflation expectations on Friday as the last few major data points ahead of next Wednesday’s FOMC meeting.

The Bank of Japan on Friday, just after a likely very hot October Tokyo CPI report, will be an interesting test of the Bank of Japan’s will on holding the line if USDJPY trades here or higher going into the meeting.

Table: FX Board of G10 and CNH trend evolution and strength.
Momentum is slipping lower for GBP – watching for an outright negative performance soon as the country struggles with an incoming recession. The runaway JPY downside may be checked at some point by intervention, but can’t be checked more profoundly until we see a policy capitulation from the Bank of Japan. Aussie’s negative momentum in the crosses is fading.

Table: FX Board Trend Scoreboard for individual pairs.
The EURCHF and USDCHF surge here happening through key levels – new breakouts to confirm trend or red herrings? EURGBP is trying to turn higher here – as note above, needs 0.8860+ for a stronger signal.  And GBPUSD has flipped back to negative – similarly needing a break though pivot lows to suggest new momentum – 1.1000 and then 1.0925 the focus there.

Upcoming Economic Calendar Highlights

• 1230 – Canada Aug. Retail Sales
• 1340 – US Fed’s Evans to speak
• 1400 – Euro Zone Oct. Consumer Confidence