Trump Cancels Trade Talks with Canada even as US Seeks Broad Alliance to Check China's Rare Earth Dominance

Overview: The US dollar is trading higher against all the G10 currencies today, but it has not broken out of this week's ranges. The Dollar Index is rising for the fourth session this week and has recovered last week's 0.55% decline. The greenback is more mixed against emerging market currencies. While the JP Morgan Emerging Market Currency Index is up about 0.15% this week, the MSCI gauge is off by about 0.10%.

Equities are mostly firmer today. In the Asia Pacific region, the Nikkei and China's CSI 300 gained more than 1%, but South Korea's Kospi jumped 2.5% and led the region higher this week with a 5.1% gain. President Lee will meet President Trump on October 29 and President Xi on November 1. The South Korea won recovered from six-month lows following verbal intervention by the finance minister. Despite a better preliminary PMI, the euro struggles to find much traction and the Stoxx 600 is nursing a small loss. US index futures are firm. Aside from the Japanese government benchmark 10-year yield, which slipped a basis point, most other major bond yields are firmer. European yields are mostly 2-4 bp higher, with the increase in France leading the region and the 10-year Gilts doing best with is nearly flat performance. The 10-year Treasury yield is slightly firmer to a faction above 4.0%. Canada's 10-year yield is about 3.5 bp higher at 3.09%. Gold is off 1.6% after rising almost 0.70% yesterday. Today's low is slightly below $4048. It settled around $4356 on Monday. December WTI is in a narrow range (~$61.20-$62.15) at the upper end of yesterday's surge that lifted it to about $62.20.

USD:   The Dollar Index reached almost 99.15 in the middle of the week, and it held yesterday. It remains firm today but in about a 10-tick range on either side 99.00. Last week's high was almost 99.50. DXY consolidated yesterday and also held above Wednesday's low, a little below 98.80. Today is the busiest the US economic calendar has been since the government shut a little more than three weeks ago. In order to allow cost-of-living adjustments in Social Security and other programs, the September CPI will be reported today. A 0.4% rise in the headline will lift the year-over-year rate for the fifth consecutive month, and at 3.1% it would be the highest since May 2024. The core rate has also risen for the past four months, but the median forecast in Bloomberg's survey sees it flat last month at 3.1%. Most Fed officials want to look through the uptick in inflation, with many seeing the impact of the tariffs as being temporary. Moreover, the balance of risks suggests the threat of further deterioration of the labor market is greater. The market has a Fed cut nearly fully discounted for next week, and given the blackout period until the meeting, there is little that officials can say to frame it differently. The preliminary October PMI is also due today, and it is expected to be softer. The composite PMI may have fallen for the third consecutive month and the fourth time in five months. Barring a dramatic revision, the final University of Michigan consumer survey is unlikely to have much impact, and the same can be said of Kansas City Fed's service survey.

EURO: The euro recorded an inside day yesterday and the market seems to lack near-term conviction. With the Fed and ECB meeting next week, the Trump-Xi meeting at the end of the week, the escalation of sanctions on Russia, uncertainty is running high. Even the stronger than expected PMI failed to have much impact and the euro is in a $1.1600-30 range. The preliminary manufacturing PMI rose to 50.0 from 49.8. The services PMI rose to 52.6 from 51.3. It is the highest since August 2024. The composite PMI rose to 52.2 from 51.2. It is a new high for the year, matching last year's high, which is the best since May 2023. Through September, it averaged 50.6 this year compared with 50.3 in the Jan-Sept 2024 period. Stronger German services appear to explain the strength, which lifted its composite to its best level since May 2023 (53.8 vs 52.0). France's composite PMI fell to 46.8 (from 48.1). It is the lowest since February's 45.1 reading. 

CNY: The PBOC has pushed the dollar fix to new lows. It was set at CNY7.0918 yesterday, the lowest since last October. It was set at CNY7.0928 today. A week ago, it was almost CNY7.0950. Nevertheless, against the offshore yuan, the dollar recorded the low so far for the year near CNH7.0850 on September 17 when the Federal Reserve cut the rates. For the third consecutive session, the dollar is in a CNH7.1230-CNH7.1300 range. Trump and Xi are still likely to meet on the sidelines of the APEC meeting at end of next week. While Trump holds out the possibility of a deal, the latest sanctions on Russia are also an indirect way to discourage Chinese companies buying Russian oil due to the threat of secondary sanctions. The US is also threatening to impose broad software curbs on China, and it is not coincidental that China's recent press release on the broader and tighter critical mineral export controls was not using a Microsoft software.

JPY: The jump in oil prices, the rise in US yields, and a growing conviction that the Bank of Japan will stand pat next week took a toll on the yen. The dollar rose to JPY152.80 yesterday and traded a little above JPY153.00 today. The greenback reached an eight month high slightly above JPY153.25 on October 10. The US 10-year yield settled fractionally above 4.0% yesterday, and the little more than five basis point increase was the largest since September 17 when the Federal Reserve cut rates. This may have also supported the greenback. Japan reported the November CPI earlier today. As hinted by the Tokyo report out late last month, the headline and core rates rose to 2.9% from 2.7%, while the measure that excludes fresh food and energy eased to 3.0% from 3.3% and is low print since April. Separately, the preliminary October PMI showed the manufacturing contraction continued (48.3 vs. 48.5), while the service PMI continued to expand but slower (52.4 vs. 53.3). The composite PMI slipped to 50.9 from 51.3. The 51.6 average in Q3 was the highest quarterly average since Q3 24. A week ago, the swaps market had a little more than a 25% chance of a BOJ hike next week discounted. It has been more than halved this week. 

GBP: Sterling recorded an inside day yesterday and slipped a few hundredths of a cent below Wednesday's low (~$1.3305) but held above $1.33. It has not been above $1.3335 today. Unless it recovers further today, it will be the fifth consecutive session of lower highs. The swaps market is discounted a year-end base rate of about 3.80%, which is off 6-7 basis points this week to around a two-month low. The current target is 4.0%. Today's data points were stronger than expected, and still sterling struggles. The UK reported a 0.5% increase in September retail sales. The median forecast in Bloomberg's survey anticipated a 0.4% pullback after a 0.5% gain in August (which was revised to 0.6%). Also, earlier today, the preliminary October PMI posted better manufacturing (49.6 vs 46.2) and services (51.1 vs. 50.8). The composite rose to 51.1, a three-month high, from 50.1. It averaged 50.9 in the first three quarters of the year.

CAD: After rising to a six-month high last week, near CAD1.4080, the US dollar pulled back in recent days. Wednesday's low was near CAD1.3975, and yesterday, the dollar held CAD1.3980. Still, for the second consecutive session, the greenback settled below CAD1.40. However, the US dollar is positing a big outside up day against the Loonie. The greenback first slipped through yesterday's lows, but the furious US suspended all trade negotiations with Canada over the Ontario province ran using excerpts of a 1987 speech by then President Reagan who defend the principle of free trade and was critical of tariffs. The clip of Reagan has been in social media for months. In fairness, the former president's foundation and institute was critical of Ontario's ad, claiming that its permission was not sought and that the "selective" use mispresents Reagan's "full address". The US dollar recovered and reached almost CAD1.4030, the (61.8%) retracement of this week's losses. The week's high was set Tuesday near CAD1.4065. The Bank of Canada meets next week. The swaps market has about a 72% chance of cut discounted, which is little changed from a week ago when the swaps market put the odds of a cut slightly below 70%. In Bloomberg's survey 10 of 14 economists (~70%) expect a cut.

AUD:  For almost two weeks, the Australian dollar has been chopping roughly between $0.6440 and $0.6535. It has been capped in front of $0.6520 today and is probing the $0.6490 area in late European morning dealings. A key question is whether it is a base or prelude to another leg down. Given the overextended momentum indicators, which have begun turning up, we suspect it is the former. Australia's preliminary October manufacturing PMI edged unexpectedly fell to 49.7 from 51.4 in September. It was the second consecutive pullback and the first sub-50 reading of the year. The services PMI firmed to 53.1 from 52.4. It ended last year at 50.8. The composite PMI rose to 52.6 from 52.4. It averaged 52.0 in the first nine months of the year compared with 51.3 in the Jan-Sept 2024 period. It was at 50.2 at the end of last year and has not been below 50.5 this year.

MXN: The dollar is coiling against the Mexican peso. An eight-day trendline comes in near MXN18.4350 today and slightly longer trendline off the lows is near MXN18.3770. Given the positioning of the momentum indicators, we are inclined to see a downside break out. It is in a narrow range of about MXN18.3870-MXN18.4185 so far today. The greenback can ease back into the MXN18.25-30 area without ending the long-term consolidation, which began the year's low set near MXN18.20 on September 17, when the Federal Reserve cut rates. Mexico reported firm August retail sales yesterday (0.6%, which is twice the year's average monthly gain) and slightly softer than expected inflation for the first half of October. An immediate risk for the Mexican peso is Argentina's legislative election on Sunday. There are arguably two key metrics of the outcome. First is the sheer number of votes case for Milei's Liberty Advances party (LLA). If it is more than the Homeland Force party, then investors may conclude the Milei is can still win re-election (2027). Second is that the LLA needs to secure at least a third of the seats in either chamber to ensure that presidential decrees cannot be blocked. Only 127 seats of 257 in the lower chamber are up for election, so a simple majority is out of reach. In the upper chamber, 24 of 72 seats are being contested. There seems to be universal opinion, except, perhaps in parts of the US Treasury, that regardless of the election the peso will depreciate. The electoral may shape the speed and the extent of the move.

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