Geopolitical news should remain central today. The US has softened its stance on Thursday’s deadline for Ukraine to accept the peace deal with Russia, and a new 19-point deal is set to be discussed in the coming days. German Chancellor Merz seemed to play down the chances of a breakthrough already this week, while the Kremlin has shown a cautiously optimistic tone.
The currency market’s reaction to Ukraine peace prospects has so far been small, with neither a break higher in high-beta European FX nor any serious pressure on the Swiss franc, the preferred safe haven for European risk.
The standout in G10 remains the yen, which continues to face speculative testing of Japanese authorities’ tolerance. Reports that the Trump-Xi call included a discussion on Taiwan yesterday isn’t helping JPY either. The diplomatic rift between Japan and China concerning Taiwan persists, and markets are adding some risk premium on the yen based on the potential economic fallout of Beijing’s retaliatory measures. Thinner liquidity around Thanksgiving could present good conditions for the BoJ to intervene in USD/JPY, ideally after a market-driven correction in the pair.
US data might potentially offer the trigger for that correction, but not today in our view. Retail sales should be quite robust, and we expect a moderate drop in consumer confidence to 93.5, close to consensus. We also see September PPI in line with expectations at 0.3% MoM.
We don’t expect major implications for rate expectations, which are currently being driven by some dovish Fedspeak. Alongside Chris Waller, we heard Mary Daly supporting a cut in December. She isn’t a voter this year, but her stance still represents some dovish pressure on the FOMC in what is shaping up as a close decision. Markets are back to pricing in 19bp of easing for December, but the dollar has remained resilient. Some year-end rebalancing flows before Thanksgiving may be getting in the way, but unless markets have a hawkish rethink, the dollar looks too strong relative to short-term rate differentials at these levels, and we see some material downside risks.
Francesco Pesole
think.ing.com