FX Daily: Risk assets bid on expected US-China downturn
Global risk assets are bid on the view that this week’s Trump-Xi meeting will be a positive one. The Fed’s 25bp interest rate cut on Wednesday will also help this, but this is already priced in. With the Chinese Central Bank continuing to set USD/CNY lower, we favor a mild downside bias against the dollar at the start of the week.
USD: Emerging market demand could weigh on the dollar
Risk assets started the week in a positive mood. Weekend reports suggest that the US and China have found common ground on topics such as TikTok sales, soybean purchases and tariffs. The view here is that a meeting between US President Donald Trump and Chinese President Xi Jinping on Thursday will probably result in a formal agreement on these areas and impose a further delay to the 125/145% reciprocal tariff levels threatened in April. Perhaps most important is what China is doing with its plans to control exports of rare earth minerals. A prolonged delay of, say, a year would be welcomed by the market. Global equity markets rallied on what they saw as a possible extension of the US-China trade truce, and risk-sensitive Australian and New Zealand dollars led gains in G10 FX today.
Assuming the Trump-Xi meeting meets these bullish expectations, the dollar may face slightly negative conditions. But there are also interest rate meetings this week in the US, eurozone, Japan and Canada. We preview the FOMC meeting here, which is expected to cut interest rates by another 25bp. In contrast to September, the dollar’s position is now more balanced, and the currency does not need to strengthen too much if Federal Reserve Chair Jerome Powell reveals latent fears about inflation. However, this seems unlikely following the release of weaker September CPI data last week.
Regarding the Fed, US Treasury Secretary Scott Bessent has announced a list of five candidates for the next Fed Chair. The surprise package on the list is BlackRock’s Rick Rieder, who will likely be welcomed by the market given his background in fixed income markets.
Another development to note this morning is the People’s Bank of China continuing to set USD/CNY lower. Is this just a gesture of goodwill ahead of the Trump-Xi meeting on Thursday, or a sign that China wants to increase its domestic demand, so a stronger renminbi would be more beneficial? Whatever happens, a stronger renminbi typically supports emerging market currencies and a slightly negative dollar.
Given the ongoing government shutdown, US data releases remain limited this week. Betting markets are giving a 49% chance that the shutdown will take place after November 16. And it could be that November 15 is an important date, where Scott Bessent stated that the US military will not be paid after that date if the closure continues. The ongoing shutdown means we probably won’t see US third-quarter GDP this week, where the consensus is for a fairly strong annual figure of 3.0% quarter-on-quarter.
DXY remains bid near 99 – mainly as USD/JPY is bid due to local politics and EUR/USD remains slightly weak. However the German Ifo may provide a boost to EUR/USD today and send DXT back to 98.50.
EUR: Focus on the Ifo index
One might think EUR/USD would perform slightly better considering the global risk environment. A US-China trade truce would be good news for global trade, allowing nascent business sentiment optimism to continue. This was evident on Friday with a surprise rise in the Eurozone PMI and bucked the emerging pessimism that economists experienced over the summer. Let’s see if that is followed up by good German Ifo numbers this morning. Here, the expectations component – which is most closely related to business investment – is expected to rise again to the 90 area.
Today the European Central Bank will also release a survey of consumer inflation expectations. The three-year rate is expected to remain flat at 2.5% and feed into a very neutral ECB meeting this Thursday. The larger debate may be left until the December meeting when the 2028 CPI estimates are released. A reading below 2.05 will open the door for pigeons.
We’re surprised EUR/USD isn’t a bit higher this morning, but we still have a slight preference for the 1.1650 area in a calm market.
JPY: Potential Trump-Takaichi meeting?
There are suggestions that President Trump may meet Japan’s new PM, Sanae Takaichi, during his visit to Asia. What to do about USD/JPY? The White House wants lower interest rates to improve the US trade deficit with Japan, while Takaichi’s policies are seen as negative for the yen, putting pressure on the Bank of Japan not to raise interest rates. Regarding this, there will be a BOJ interest rate meeting on Thursday, and the market is now only giving a 10% chance of a rate hike.
We can’t see what will send USD/JPY lower in the short term – until we see a broad dollar decline. However, we suspect policymakers in Japan will want to intervene and sell the dollar if it manages to reach the 155-160 area. For reference, Japan last sold USD/JPY near 160 in July 2024.
CEE: Risk-on sentiment and hawkish central banks help the region make fresh gains
The economic calendar in CEE is quiet towards the end of the month, and we will only see the first important figures in the second half of the week.
On Thursday, the first GDP figures for the third quarter in the CEE region will be published. In Hungary, after moderate quarterly growth in the second quarter, we will likely see negative performance in the third quarter. However, the low base is likely to have a positive impact, lifting the year-on-year figure to 0.6%.
In the Czech Republic, the economy is likely to maintain solid annual growth, with household consumption remaining the main driver. The new thing that might happen is a change in the dynamics of fixed investment into positive territory after six quarters of continuous annual decline.
On Friday, we will see preliminary inflation figures for October in Poland. Our initial estimates show that CPI inflation increased slightly from 2.9% to 3.1% year-on-year, largely due to energy prices. Core inflation, excluding food and energy prices, was broadly unchanged.
In the Czech Republic, the Czech National Bank blackout period begins on Thursday, and we will see more speakers in the next few days. So far, we have heard Deputy Governor Eva Zamrazilová indicate stable interest rates at least until the end of the year.
Given the light calendar in the CEE region this week and positive trade headlines, the global risk-on sentiment is expected to boost CEE FX at the start of the week and generate some upside.
EUR/CZK struggles to break 24,300 for now, but the global mood and hawkish CNB could provide good support to test new lows. EUR/PLN has failed to stay below 4,240 in recent days, but this week could be helped by stronger inflation figures in the face of dovish market expectations.
Source: ING
