Market Brief: Dollar Treads Water as Oil Prices Slump 

The dollar is edging lower this morning as geopolitical concerns ebb, but continues to hold gains achieved over the first two weeks of October, remaining higher against all of its major counterparts excepting the safe-have Swiss franc.

Easing expectations fell further in yesterday’s session when Federal Reserve Governor Christopher Waller clearly indicated a preference for cutting rates in smaller-sized increments. “I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting,” he said, noting that if the current trajectory of inflation and employment data is sustained, “we can proceed with moving policy toward a neutral stance at a deliberate pace”. Futures markets are now pricing in six rate cuts by the end of 2025, two fewer than in the aftermath of September’s policy decision.

The “Trump trade” is generally understood to be playing a role in foreign exchange markets, with investors seen buying the dollar on dips as they seek to front-run an increase in inflation, interest rate, and volatility expectations. Although Kamala Harris has maintained a slight edge in recent polls, prediction markets have tilted dramatically in Donald Trump’s favour over the last week, and the odds of a Republican sweep have risen sharply, theoretically raising the need for dollar liquidity - but we’re still struggling to find clear evidence of a politically-driven bid for the greenback, beyond the typical pre-election hedging surge.

Global oil benchmarks are softening after the Washington Post reported that Israel intends to avoid targeting Iranian oil and nuclear infrastructure in retaliation for a missile attack on October 1. Separately, the International Energy Agency published a forecast showing that oil demand growth will continue to slow over the next year even as US production expands, forcing the global market further into oversupply.

The pound is advancing in hesitant trading. According to the UK Office for National Statistics, the jobless rate slipped to 4 percent in August - lending more weight to the argument for a cautious easing cycle from the Bank of England - but wage growth continued to ease, and the number of vacancies kept falling, making it difficult to determine the degree of slack available in labour markets. Tomorrow’s consumer price index report could play a more decisive role in determining exchange rate outcomes, with year-over-year inflation seen falling below the central bank’s 2-percent target.

The euro is regaining its footing after demand for credit climbed in the common currency area for the first time in more than two years, suggesting that the European Central Bank’s monetary easing efforts are helping drive an improvement in financial conditions. Policymakers are widely expected to respond to clear evidence of disinflationary pressures and signs of widespread economic weakness with a third consecutive rate cut at Thursday’s policy meeting, further widening the differential with US rates.

China’s renminbi is back on the defensive. Officials failed to provide specifics on the scale and scope of planned stimulus efforts in Saturday’s hotly-anticipated briefing, and announcements in the days since have proven relatively underwhelming, forcing investors to question the government’s commitment to providing policy support in volumes sufficient to offset the country’s growth challenges.

The Canadian dollar is trading sideways in the run-up to the release of September’s inflation data at 8:30. Economists suspect that headline prices fell -0.2 percent on a month-over-month basis, with a big drop in gasoline prices contributing the bulk of the decline. The Bank’s preferred core measures are more difficult to forecast, but we doubt they will provide sufficient motivation to deliver an outsized rate cut at next week’s meeting. Survey data last week showed business and household sentiment staying subdued in the third quarter, but home price expectations remained robust and consumers grew slightly less concerned about the impact that high inflation and rising interest rates might have on their spending plans - suggesting that consumption growth could stabilise near current levels.

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