The markets were not impressed with the ADP private sector jobs estimate. Although it increased for the first time since July, the average over the three months through October was 3.3k, the weakest since August 2020. The Dollar Index snapped a five-day advance after the mid-week report and will begin the new week with a three-day downdraft in tow. Despite several Fed officials seeming to question the desirability of a cut in December, the market was undeterred, and the Fed funds futures market continues to almost a 70% chance of a cut. The US government remains closed, and in addition to the missed paychecks, it is also disrupting air traffic with delays and as of Monday, a 10% cut in flights at major airports. While the path toward re-opening is not clear, it seems as if pressure is building and negotiations have begun to re-open.
The questions asked by the justices seem to reflect a skepticism about the Trump administration's use of emergency powers to impose a wide range of tariffs. The odds in the event markets (e.g. Polymarket.com) were marked down to reflect this. However, reports suggest that hedge funds have been buying the claims of potential refunds for $0.40-$0.50 on the dollar. The administration can find other authority to use, but they are all more circumscribed. The recent additional 10% levy on Canada for the advertisement run showing former President Reagan critical of tariffs, for example, would most likely not be repeated, though it is not clear under what authority it was imposed.
US
Drivers: The dollar's broad gains appear to be correlated to the change in US rates. The rolling 60-day correlation of changes in the Dollar Index and the US two-year yield slightly below 0.60, near the highest for the year. It had briefly dipped below 0.10 in March. The correlation between DXY and the 10-year yield is almost as less robust. The high was recorded in mid-September a little over 0.60. We suspect the dollar's resilience forced bears to cover shorts, but it may have largely run its course.
Data: With the Federal government still closed, and no Fed or private sector surveys, the calendar is light. Comments from Fed officials will be scrutinized as market participants continue to assess likelihood of a December rate cut. Governor Miran seems increasingly isolated, and the real issue is whether to pause in December or deliver another quarter-point cut. At his press conference, Chair Powell said he was not anticipating further deterioration in the labor market and the inflation, adjusted for the impact of the tariffs, is closer to target. This seemed to imply the bar to another cut is relatively high barring evidence to the contrary. The US Treasury sells three-, 10-, and 30-year bonds this week. Note that November 11, Veterans' Day, the US equity market is open while the bond market is closed.
Prices: The Dollar Index poked above the August 1 high (~100.25) on November 5 and stalled near the 200-day moving average (100.35), which it has not settled above since early March. The momentum indicators are getting stretched. A band of support is seen in the 99.25-55 area. A break of it would be an early signal that the upside correction may be over, while a push below 98.75 would boost confidence that is the case.
EMU
Drivers: The euro is more sensitive to changes in the US two-year interest rates than German interest rates or changes in the interest rate differential between the US and Germany. The rolling 60-day correlation of changes of the euro and the US two-year yield is inverse around -0.55. The extreme reading was in late October was a little more than -0.65. That was the most inverse the correlation has been since March 2020. The inverse correlation of changes in the euro and Germany's two-year yield reached the year's extreme a little more than -0.40 in late October and is now near -0.30. It has not been more than -0.50 since the pandemic, but it was positively correlated in the first five months of the year. Changes in the euro and the US two-year premium over German are inversely correlated (~-0.45) over the past 60 sessions. It was around -0.70 at the start of the year, which may have been the most extreme since at least 1980.
Data: The four largest EMU members reported that August industrial production fell. Coming into this week, three them have reported a recovery in September, including Germany's 1.3% increase. Italy's figures will be available the day before the aggregate figure is published on November 13. Industrial output in the eurozone has alternated between advances and declines on a monthly basis, and after the 1.2% decline in August, a gain was "due" in September. Through August, it has risen by 0.1% a month. It fell by an average of 0.2% a month in the first eight months of 2024. Still, with the initial estimate of Q3 GDP in hand, September data, which includes trade figures in the coming days, loses whatever market moving ability it may have had. Germany's November ZEW survey may draw some attention. The expectations component has risen for the past two months, and October's 39.3 reading compares with 15.7 at the end of last year. On the other hand, the current assessment has fallen for the past three months. It stands at -80 and -93.1 at the end of last year.
Prices: The euro fell to around $1.1470 last week, its lowest level since August 1. It appears to have forged a base near there and managed to recover to $1.1565 before the weekend, a new high for the week. A move above $1.1575 targets the $1.1600 area. It may take a push above $1.1640 to boost confidence that a low is in place. The momentum indicators are stretched. Should the $1.1470 area give way, the late-July/early August lows (~$1.1390-$1.1400 area is the next obvious target.
PRC
Drivers: The correlation between changes in the offshore yuan and the Dollar Index has gone through a few distinct phases this year. The 60-day rolling correlation began this year around 0.75. In February through early May, the correlation eased to 0.40-0.50 and most of May through mid-July was weaker still (~ 0.20-0.30). It began recovering and in August through October, it hovered around 0.60. It fell back to 0.40 in late October and is now around 0.45. Meanwhile, the PBOC has steadily lowered the dollar's fix, without spurring strong gains in the offshore yuan (the dollar's low for year was recorded on September 17) and without seeing the implied volatility of the onshore yuan from increasing. The three-month implied volatility for CNY is near the lowest it has been since 2017. Around the US "Liberation Day" in early April, it had spiked above 7.5%, a two-and-a-half-year high.
Data: China reports October data, including retail sales, industrial production, investment, house prices, and lending figures. China's growth has averaged about 1.1% a quarter this year after 1.33% average in 2024. Officials do not seem to have a sense of urgency to provide more economic stimulus. Coming out of the Fourth Plenary session, the focus is in continuing to reduce foreign dependence (import substitution), boosting domestic consumption, while emphasizing leading edge technologic development, and enhancing its international standing.
Prices: The dollar peaked slightly above CNH7.15 in October and last week was turned back from around CNH7.1385. Initial support has been found near CNH7.12. We suspect there is initial potential toward CNH7.10 in the coming days. That the exchange rate was not discussed at the "G2" meeting disappointed the China hawks in the US. Yet, it seems is it would have been relatively easy for China to have batted it aside. The problem, Beijing could easily argue, is not the yuan but the dollar. The greenback is extremely over-valued and not just against the yuan but most G10 currencies, aside from the Swiss franc. China could reiterate comments from many economists who see the 6-7% budget deficits and a current account deficit in excess of 4% sucking in the world's savings, underpinning the dollar. The antidote for the strong dollar is not to be found in Beijing, Tokyo, or Frankfurt but in Washington.
Japan
Drivers: Since March, when the rolling 60-day correlation of changes in the dollar-yen exchange rate and the Dollar Index fell to its lowest level since July 2022 (<0.35), it has recovered. It reached almost 0.90 in June and most of July. It has eased a bit but has held mostly above 0.75 but below 0.80 since early October. The 60-day correlation of changes in the exchange rate and changes in US two- and 10-year rates is around 0.55-0.57, the lowest end of where it has been since the end of July. The correlation of changes in the exchange rate and Japanese bond yield, (10, 30, and 40-year rates) range from practically zero to 0.25.
Data: Japan reports September's current account and trade balance. The market is not particularly sensitive to the data point. Through August, Japan's current account surplus averaged JPY2.62 trillion compared with JPY2.58 trillion average in the year ago period. However, what seems to be lost on many observers is that despite that under nearly any metric the yen is dramatically undervalued, Japan runs a trade deficit. That shortfall has averaged JPY232.5 bln a month this year after a JPY414.8 bln deficit in the first eight months of 2024. Japan does not report Q3 GDP until November 17. The median forecast in Bloomberg's survey is for a 1.1% contraction at an annualized pace. The odds of a hike in December edged up to around 50%, a smidgeon higher than a week ago.
Prices: The greenback tested the JPY154.50 area approach in late October. It held with the help of verbal intervention by the MOF and the pullback in US rates. The trendline connecting the October lows (~JPY153.15 before the weekend) was frayed. Nearby support is seen in the JPY152.50-60 area, and a break of JPY151.90 would weaken the dollar's technical tone. The momentum indicators look poised to turn down.
UK
Drivers: The rolling 60-day inverse correlation between the changes in sterling and the Dollar Index reached a new extreme for the year in late October at a little more than -0.85 and it is still around there. It was the most since mid-2024. Sterling's 60-day correlation with the changes in the euro is slightly less than with DXY. Its inverse correlation with changes in the US two-year yield reached the extreme for the year (~-0.55) in early November and is near -0.50 now. Sterling's inverse correlation with changes in the UK's two-year yield is around -0.35. It reached the most extreme since the end of 2022 in July (~-0.45).
Data: The UK reports labor market data for October and September's wages and Q3 GDP. The labor market conditions have eased but wage growth is higher than many Bank of England officials would like. The Bank of England left policy unchanged last week, but the swaps market is pricing in almost a 70% chance of a cut next month. The UK also sees Q3 GDP and details. The monthly GDP contracted by 0.1% in July and grew by 0.1% in August. The median forecast in Bloomberg's survey is for 0.2% quarter-over-quarter growth in Q3. The risk would seem to be on the downside given that the September composite PMI tumbled from 53.5 to 50.1, the low for the year. The November 26 Autumn budget remains a source of anxiety and a weight on sterling.
Prices: Sterling posted a bearish outside down day the day before the Fed's hawkish cut on October 29. It has not looked back. Sterling peaked near $1.3370 that day and tested the $1.30 area last week. It held and sterling recovered to the $1.3140-45 area. A move above there would target the $1.3200 area initially. The momentum indicators look poised to turn up and there may be near-term potential toward $1.3240-60.
Canada
Drivers: In February and again in early April, the 60-day correlation of changes in the USD-CAD exchange rate and the Dollar Index fell to around 0.35, the weakest since October 2023. It trended higher and reached about 0.75 in early October. It has since eased to slightly below 0.60, around a six-month low. The correlation between changes in the exchange rate and the US two-year yield reached its highest level since late 2022 in early October, near 0.55. It has pulled back to around 0.35. The correlation was inverse from mid-March through late May this year. The correlation between changes in the exchange rate and the price of oil (WTI) is often inverted, but it has been positively correlated (rolling 60-day basis) since early July. It is the most sustained positive correlation since the first part of 2014. but was slipping back into inversion at the end of last week.
Data: The economic calendar is devoid of market moving data. September housing permits, manufacturing and wholesale sales are due. The record of the Bank of Canada's late October rate cut will be published. Governor Macklem seemed to imply that the bar to another cut is high. The swaps strip has policy steady through Q1 26. It is discounting slightly more than a 50% chance of a cut in April through July. Canadian markets are closed for Remembrance Day, November 11.
Prices: The US dollar reached CAD1.4140 last week, a little shy of the (50%) retracement of this year's losses, which is found near CAD1.4165. The momentum indicators are still trending higher, suggesting the high for this move may not be in place. The next chart area in the CAD1.4200-10 area. Nearby support is seen around CAD1.4080 and then CAD1.4045.
Australia
Drivers: In early October, changes in the Australian dollar's exchange rate and the Dollar Index were inversely correlated by around -0.82 on a 60-day rolling basis, the most since July 2024. It has since slackened to around -0.45, the least since May 2022. The 60-day correlation with changes in the US two-year yield is almost -0.10, and the correlation with Australia's two-year yield is slightly inverse (-0.06). The 60-day correlation between changes in the exchange rate and gold peaked in early June a little below 0.60 and now is hovering near 0.20.
Data: The Reserve Bank of Australia held policy steady last week, with the overnight target rate at 3.60%. The market understands the central bank will most likely remain on the sidelines through Q1 26. In the futures market, there is slightly more than a 70% chance of a cut discounted by the end of Q2 26. This week's employment data are unlikely to significantly impact expectations, which may be more sensitive to inflation developments. The Australian labor market has slowed this year. Overall jobs growth has slowed by nearly two-third to an average about 13k a month. Similarly, full-time position rose by an average of 9.2k a month this year after almost 28k a month in the Jan-August 2024 period. The participation rate slipped slightly (67.0% vs. 67.1% in August 2024), but the unemployment rate has risen from 4.0% in August 2024 to 4.5%, the highest since late 2021.
Prices: The Australian dollar traded near $0.6620 before the Federal Reserve delivered the hawkish cut on October 29. It fell to about $0.6460 last week before consolidating in the last couple of sessions. The momentum indicators are still falling. The 200-day moving average is near $0.6450 and the Aussie has not traded below it since June and has not settled below it since the end of May. It needs to re-establish a foothold above $0.6520 to lift the tone, which could spur a move into the $0.6550-60 area.
Mexico
Drivers: The 60-day correlation between changes in the dollar-peso and the Dollar Index reached around 0.75 in late September, its highest since 2012. However, it has slackened recently to around 0.45, the least since July. The exchange rate does not appear sensitive to changes in the US two-year yield, and the correlation has hardly been above 0.25 since early this year and is now nearly flat. The exchange rate's inverse correlation with the US S&P 500 has strengthened from almost nothing as recently as early August to -0.60. It has not been more than -0.65 since July 2022.
Data: Mexico's central bank cut its overnight target rate by 25 bp last week to 7.25%. It was responding to the weakness of the economy. Mexico's contracted by almost 0.3% in Q3. The economy contracted by 0.25% on a year-over-year basis, the first since Q1 21. The combination of the GDP report and the rate cut means that this week's September industrial production report will likely have little impact.
Prices: The risk-off mood, reflected in the pullback in US equities and rates, saw the dollar jump to MXN18.70, a two-month high, in the middle of last week. It fell to a three-day low before the weekend near MXN18.5260 but weakness in US equities may have helped deter a test on the week's lows in the MXN18.4650-MXN18.48 area. The momentum indicators look poised to turn lower in the coming days.
Reviewed by Marc Chandler
on
November 08, 2025
Rating:
