Week Ahead: Five G10 Central Banks Meet and Reserve Bank of New Zealand and the Bank of Canada are Most Likely to Hike

The US dollar was mostly softer after the G10 currencies last week. The euro, where the bond tensions escalated, was the notable exception. It finished the week with a modest loss of about 0.35%\. It was the sixth weekly decline in the past seven weeks, Moody's did not downgrade France's credit worthiness, but the prospect of more social unrest this weekend, warns of downside risks for the euro at the start of next week. The French 10-year premium widened by 30 bp over Germany last week to finish at about 167 bp, which nearly double what it was at the end of August, and the most since 1990.  The euro was sold to new lows for the year against sterling and the yen ahead of the weekend. A summary of last month's Swiss National Bank meeting downgraded the concern about the exchange rate strength, but since the end of last month, the franc has appreciated by more than 3% against the euro and reached its best level since early July. 

Half of the G10 central banks meet next week. It had looked like the Reserve Bank of New Zealand was the most likely to raise rates, but market sentiment has also swung in favor of a Bank of Canada rate increase, too. While the Federal Reserve, the European Central Bank, and the Bank of Japan will most likely stand pat, the most likely scenario is that all three hike rates in December. The US and eurozone report their first estimates of Q3 GDP. The US economy may have accelerated to 3.0% or above on annualized basis, while the eurozone economy looks to have slowed to 0.2% quarter-over-quarter from 0.6% in Q2. 

US

Drivers: The dollar has become more sensitive to changes in the 10-year yield than that two-year, but the correlations are both much less than earlier in the year. The 30-day correlation of changes in the Dollar Index and the two-year Treasury yield is around 0.35, well below the 0.80 correlation seen in May and June. The correlation between changes in DXY and the US 10-year yield is around 0.45. Its peak was near 0.75. Beyond interest rates, the dollar's resilience appears to be partly a function of the conclusion that it is best positioned to absorb the shocks, some of which are its own making. 

Data:   The most important event in period ahead is the FOMC meeting that concludes on October 28. We did not attribute strong chances of back-to-back rate hikes by the Federal Reserve, and since early this month, the speculation has eased. The Fed funds futures are discounting around a 10% chance of a 25 bp hike, down from a 70% chance in late September. Still, the market has a December hike largely discounted and another one likely by end of Q1 27. September personal income, consumption, and deflators are due the following day (October 29). Spending seems to have slowed from 0.9%, but the median forecast in Bloomberg's survey for a 0.6% increase is still robust. From the CPI and PPI, economists have a good handle on the PCE deflator. The headline pace may tick up to 3.6% from 3.4%, while the core rate is seen firming to 3.1% from 3.0%. However, the highlight of October 29 is the first look at Q3 GDP. The median forecast in Bloomberg's survey is 3.0%, while the Atlanta Fed's GDP tracker is at 3.5%. An increase in capex and government spending is expected to more than offset a modest pullback in consumption and weaker net exports. 

Prices: The Dollar Index made marginal new low for the month on October 22, slightly below 101.50, and consolidated ahead of the weekend. A move above last week's high, a little below 102.10, could signal a re-test on the year's high recorded on October 14 near 103.00. Recall that the 102.85 area is the halfway mark of DXY's decline from last year's high (~110.15) and the next retracement is nearly 104.60. Still, note that the momentum indicators have turned down from over-bought readings and the five-day moving average did cross below the 20-day moving average for the first time since mid-September in the middle of last week. 

EMU

Drivers:  The rolling 30-day correlation of changes in the euro and changes in the US-German two-year and 10-year interest rate differentials is near -0.45. That is around the greatest inversion of the year. The 30-day correlation between changes in the euro and the German-French 10-year differential is around 0.50. After peaking near 0.70 in early June and reached 0.60 recently. The correlation was briefly inverted last month. 

Data:   The European Central Bank meets on October 29. Like the Federal Reserve, it does not seem prepared to hike key rates at back-to-back meetings. However, the market anticipates that another hike, the third of the year, will be delivered in December (~75%). The swaps market anticipates another hike in Q1 27 (~60%). On October 30, the first estimate of the aggregate Q3 GDP is due. The median forecast in Bloomberg's survey anticipates that the economy moderated after growing 0.6% quarter-over-quarter in Q2 to around 0.2%. On October 30, the four largest members of the eurozone will also report October CPI, although the aggregate estimate will not be reported until November 4. 

Prices: The euro toyed with the 20-day moving average last week, which it has not settled above since September 9, but ultimately broke lower. The price action reinforces the cap in the $1.1260-70 area. Although there may be support near $1.1115, the year's low near the (50%) retracement objective of the rally from last year's low (~$1.0140) found near $1.1110 looks vulnerable. There may be some psychological significance of $1.10, the next retracement (61.8%) is around $1.0880. Here, too, we note that the momentum indicators have turned higher but are still oversold. 

PRC

Drivers: Beijing continues to signal acceptance of a gradually appreciating yuan. Currently, the signal is sent most clearly by the daily fix. It is possible, as some argue, that the state banks are accumulating foreign assets as a "stealth intervention", though we suspect commercial and pecuniary motivations are the key, but it should be seen as a moderating force. Surely, the PBOC is not consistently setting the dollar's fix lower and trying to engineer weaker yuan. 

Data:   September industrial profits will be reported on October 27. The year-to-date year-over-year measure improved in first part of the year but has weakened in the last three months. It is the longest decline since 2024. China's CSI 300 equity index is off nearly 10% this year and in mid-October, reports suggested that Beijing was encouraging insurance companies and state funds to support the equities. China's October PMI will be reported on October 31. New modest stimulative measures have been announced in recent weeks. 

Prices: The dollar quietly is grinding slowly lower against the yuan. It reached almost CNH6.6685 against the offshore yuan before the weekend, a new multiyear low. While attentive to signals from the PBOC, we suspect the dollar may finish the year near CNH6.62 compared with the CNH6.67 median forecast in Bloomberg's latest survey. The onshore yuan rose it its best level since June 2022 last week (~CNY6.67). The median forecast in Bloomberg's survey for the end of the year is CNY6.68. Our more favorable outlook for the yuan would see it around CNY6.65. 

Japan

Drivers:  Over the past 30 sessions, changes in the dollar-yen exchange rate is most correlated with changes in the two-year interest rate differential than the other financial variables we track, outside of the Dollar Index itself   It is around 0.65, the highest since early June, compared with about 0.62 for DXY. The yen's weight in the Dollar Index is 13.6%. The 30-day correlation between the exchange rate and the US 10-year yield is around 0.58 and the correlation with the US two-year near 0.61. 

Data: There are two highlights in the coming days. First, on October 30, Tokyo's October CPI is due. It offers solid insight into national price developments. Tokyo's September CPI jumped to 2.7% from 1.9%, largely a reflection of the effects of childcare and water fee waivers, though underlying price pressures were evident. Yet, the impact on the second highlight, the BOJ meeting is likely to be modest. Like the Federal Reserve and European Central Bank, the Bank of Japan is unlikely to hike rates at back-to-back meeting. The swaps market has about a 75% chance of a December hike discounted and leans toward another hike in H1 27. The BOJ will also update its economic forecasts. Recall that in July, it projected growth to be 0.6% this year, 0.8% in 2027 and 2028. Core inflation was seen at 2.5% this year, 2.4% next, and 2.0% in 2028. 

Prices: The dollar forged a cap around JPY158.50 in recent weeks. It broke down last week. It was as if it was pulled down by the sharp drop in US interest rates spurred by the intensification of the retreat from the AI-meme and perhaps as a safe haven from the high yielding eurozone sovereigns. The greenback met the (50%) retracement objective of the rally from the September 9 low (~JPY152.90), found near JPY156 ahead of the weekend. The next retracement (61.8%) is about JPY155.25. The momentum indicators have turned down, and the five-day moving average crossed below the 20-day moving average last week. The JPY157 area may now offer initial resistance. 

UK

Drivers: Although changes in the euro and sterling are highly correlated (~0.85 past 100 sessions), sterling is at its best level against the euro since last May. It has appreciated almost 4% against the euro this year and is nursing a negligible loss of around 0.75% against the greenback. Those challenging the dollar's resilience have been better off buying sterling than other G7 currencies. 

Data: The UK reports September consumer credit and mortgage lending figures on October 29, but the highlight is Chancellor of the Exchequer Healey's presentation of the budget on October 28. The rise in market rates and increased spending has eaten away at the fiscal cushion. Several measures have already either been announced (temporary reduction in the VAT on gasoline), or hinted at, like the surcharge on the profitability of banks. In 2023, the Tory government cut the bank surcharge on the corporate tax to 3% from 8%. Fully reversing it could raise ~GBP3 bln (~$4 bln) but banks warned that increasing their tax could reduce lending, and Bank of England Governor Bailey warned that higher taxes will translate into high mortgage rates. There is some speculation that Healey also may endorse a "wealth" visa program, resurrecting the broad concept, ended by Boris Johnson, of the "investor visa". 

Prices: Sterling reached almost $1.3420 on October 22, its best level since September 16. It likely marks a near-term high. It met the (50%) retracement of sterling's losses since the August 21 high (~$1.3675) and stopped shy of the 200-day moving average (~$1.3435). The pullback, we envisage, could take sterling back into the $1.3280-$1.3300 area. 

Canada

Drivers:  The 30-day correlation between changes in the Dollar Index and the US dollar-Canadian dollar exchange rate is a little above 0.70. The correlation between the exchange rate and the two-year interest rate differential is around 0.62, where it has steadied after trending higher since mid-June. The correlation between the exchange rate and the US two-year yield is a little above 0.38 and slightly inverted (~-0.10) with changes in Canada's two-year yield. 

Data:   The Bank of Canada meets on October 28. The swap market boosted the odds of a rate hike from about 35% on October 16 to 80% ahead of the weekend. The odds jumped after the firm September CPI reading on October 19 (3.2% vs. 3.0% in August). On October 30, the August monthly GDP is due after a flat July reading. The downside risks to growth that the central bank has highlighted appear to be materializing. The economy grew by 3.3% at an annualized pace in Q2, and the median forecast in Bloomberg's survey is for 1.6% growth in Q3. 

Prices: With the help of falling interest rates and a smaller US premium, the US dollar continued to surrender the gains registered from early September (~CAD1.3760) to the mid-October high (~CAD1.4300). With last week's losses, it nearly met the (61.8%) retracement target, near CAD1.3965. The CAD1.4050 area may offer initial resistance. The momentum indicators are falling hard but are not oversold. The five-day moving average is the below the 20-day. The note of caution comes from the Bollinger Band, which the greenback has settled below for the past four sessions. The Canadian dollar begins next week with a seven-day rally in tow, its longest advance since March 2022. 

Australia

Drivers:  Australia and Norway have the highest policy rates in the G10, and their currencies are the best performers this year. Hawkish comments by the central bank have boosted the market's waning confidence that even after four hikes this year, weakening of the real estate market, and a disappointing September jobs report, and a disappointing flash October PMI, the tightening cycle may not be over. The futures market has about a 63% chance of a hike at the November 3 meeting, a little more than 70% chance of a hike discounted before the end of the year, up from less than 45% a week ago, and a little more than a 90% chance of hike by the first meeting in 2027 (Feb 9). 

Data: The September and Q3 CPI will be reported early on October 28. August CPI rose 4.0% year-over-year. Last September, the CPI 0.5% month-over-month, and 1.3% in Q3 25, quarter-over-quarter. Private sector credit growth has been robust. It rose at an 8.4% year-over-year pace in August. It peaked near 8.6% in June, the strongest pace since October 2022. Slower credit growth would support ideas that the four hikes this year are indeed having impact. 

Prices: The Australian dollar reached a three-and-a-half month low in the middle of October ($0.6895) and recovered to about $0.7035 last week. It met the (38.2%) retracement of its leg down from the September 9 high (~$0.7240). The 200-day moving average is near $0.7050 and the next retracement (50%) is about $0.7065. The momentum indicators are trending higher. A close below $0.7000 would disappoint the momentum traders. 

Mexico

Drivers: The peso has been hit by three forces that caught the market ill-prepared. The peso's losses, the most among emerging market currencies this month (~3.4%) contrast to the Colombian peso, which leads the EM complex this month (~3.9%) followed by Russian ruble (3.2%) and the Brazilian real (~2.8%). The unwinding of US dollar-funded structures seemed to have initially triggered the move, followed by a surprisingly dovish minutes of the recent Banxico meeting, and now the stymied trade talks with the US. 

Data: September trade figures are due on October 27. Mexico's external account has strengthened this year, even though the domestic economy is lackluster. In the first eight months of the year, Mexico recorded a trade surplus of $9.86 bln. In the first eight months of last year, Mexico reported a trade deficit of about $913 mln and a deficit of $17.9 bln in the same period in 2024. Exports are up 29.3% year-over-year through August, while imports 26.7% On October 30, Mexico reports Q3 GDP. The economy grew by 1.4% quarter-over-quarter in Q2. The median forecast in Bloomberg's survey projects a 0.1% quarterly expansion in Q3. An unexpected contraction would reinforce the dovish cast of the recent Banxico minutes. 

Prices: The dollar spiked to MXN18.85 on October 22. It has not been this high since September 2025. It seems excessive, but that may speak to market positioning. The dollar recorded two-year lows in early September. It spent the pre-weekend session consolidating within the previous session's range. The next technical area of note is MXN18.95-MXN19.10. Initial support may be near MXN18.60, and then MXN18.50. 

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