The Lack of Urgency Expressed by NY Fed President Williams Pushes Rates Lower and Weighs on the Greenback

The combination of lower oil prices yesterday and less hawkish comments by NY Fed President Williams helped steady US interest rates yesterday. Williams, who has a permanent vote on the FOMC as its vice chair, open speaks as part of the Fed’s leadership, and downplayed the sense of urgency. The Fed funds were discounting about a 70% chance of a hike at the October FOMC meeting, a few days before the midterm election.  The implied odds of a 25 bp cut are now nearer 40%. 

The dollar is trading with a heavier bias today against nearly all the G10 currencies.  A less than hawkish statement following yesterday hike by the Reserve Bank of Australia, and today’s slightly softer than expected August CPI has weighed on the Aussie today. Ahead of the week-long holiday beginning tomorrow in China, the PBOC unexpectedly set the dollar’s reference rate relatively sharply lower today (CNY6.7351), a new low since January 2023. New monetary and fiscal measures to support the economy have been unveiled over the last couple of days. 

Prices 

G10

• The euro was sold to new lows since mid-2025 yesterday. It reached nearly $1.1310 in the North American session. It was the sixth decline in the past seven sessions.  It settled a little below the middle of the session’s range. The euro is consolidating with a slightly firmer bias today and reached almost $1.1365 in early European turnover. It must settle above $1.14 to be anything notable. There is little on the charts until closer to $1.12, and the (50%) retracement of the euro’s rally from 2025 low (~$1.0140) is near $1.11.  

• The yen traded in the lower half of Monday’s range yesterday. After recording the session low in early North American turnover yesterday, near JPY157, the greenback bounced back toward the session high (~JPY157.70) before drifting back to the lower end of the session’s range in North American afternoon.  The fiscal half-year end in Japan related flows drove the dollar to about JPY156.40 in Tokyo, an eight-day low and it quickly recovered to around JPY157.20.  It has been trading between roughly JPY156.70 and JPY157.10 in Europe.  Options for $1.4 bln at JPY157 expire today. 

• Sterling slipped couple of hundredths of a cent yesterday to draw a little closer to $1.32. It has not traded below there since late June, and it recorded the year’s low (so far) around $1.3140. It recovered to settle near the middle of the day’s range and reached nearly $1.3280 today, which is almost Monday’s high. A close above $1.33 would lift the tone. 

• Canada’s local markets are closed today. The Canadian dollar’s losses were extended yesterday. The last time it rose was on September 18. The greenback frayed CAD1.42 yesterday for the first time since early July. The year’s high was recorded on June 24, near CAD1.4250. We argue the exchange rate is particularly sensitive (robust correlation) to the US two-year premium over Canada, which has shot up from 122 bp in early September to almost 158 bp yesterday. However, late in the day, as the US two-year yield pulled back the premium narrowed for the first time in more than two weeks, and the greenback drifted back toward the session low (~CAD1.4170-75). It is trading inside yesterday’s range today. 

• As has been the case with the other G10 central banks that have lifted rates recently, the Australian dollar was sold yesterday.  The RBA’s hiked but Governor Bullock might be satisfied pending the evolution of the data.  Still, even when the RBNZ, BOJ, and ECB signaled they would likely raise rates again, their currencies declined.  The sole exception in this latest round was the Federal Reserve and US dollar. The Aussie was sold to about $0.6965. Slightly softer inflation and a larger than expected drop in building approvals seemed to weigh on the Aussie, which slipped slightly below $0.6960. Nearby chart support is seen around $0.6950, where options for A$340 mln expire today. If that yields, the $0.6900 area comes into view.   

EM 

• The Mexican peso continued to be walloped yesterday.  Its headlong plunge has seen it dive nearly 5.5% over the past six sessions. Not to put too fine of a point on it but consider that at the end of August one-month implied volatility was slightly below 6.5%. It was one of the characteristics that made it a favorite for carry trades.  One-month implied vol reached almost 12% yesterday.  The dollar approached the high for the year, recorded six-months ago, near MXN18.1650. A move above it may target the MXN18.25 area next. The greenback is trading firmly but inside yesterday’s range. The momentum indicators are overextended, but respecting the price action, means waiting and looking for some sign the surge is over. Taking out the previous session’s low would be the bare minimum necessary.  It has not happened for seven sessions. Yesterday’s low was about MXN17.8730. 

• The greenback recovered after approaching CNH6.7035. The dollar returned to approach the session high against the offshore yuan in the North American afternoon. It reached CNH6.7115. The dollar is recording an inside day, However, ahead of the extended holiday, starting tomorrow, the PBOC set the dollar’s reference rate unexpectedly lower. The CNY6.7351 fix today is a new cyclical low. It was set at CNY6.7411 yesterday and CNY6.7828 at the end of August.

• The Indian rupee edged higher today for the first time this week.  The pullback in oil prices and broadly softer US dollar helped.  The dollar reached a high near INR96.1540 yesterday and eased to INR95.7475 today, its lowest level since the middle of last week.  

Other Markets

• US equities continued to wilt under the deluge of raising yields. Since early August, the S&P 500 has fallen for three sessions each week.  It has a two-day slide coming into today. US index futures are narrowly mixed.  The MSCI Asia Pacific Index snapped its two-day slide today, led by a nearly 2% rally in the Nikkei. South Korea, India and Singapore did not participate in today’s regional rally. Europe’s Stoxx 600 is flattish and has settled pennies above 638 for the past three sessions and it is still there now. 

• The 10-year Treasury yield rose four basis points yesterday to a little above 5.28% before pulling back Comments by NY Fed President Williams sounded dovish compared with many of his colleagues who have spoken recently.  He played down the sense of urgency and US rates softened. Benchmark yields are off mostly 2-5 bp today.  Still, it has been a terrible month for bonds. The US 10-yield yield is up almost 50 bp, France 60 bp, Italy 40 bp, Germany 25 bp, the UK 30 bp, and Japan 12 bp.   

• Gold steadied yesterday after plunging $169 (~4%) on Monday. It held above Monday’s low (~$4111) and made new session highs late in the session near $4180.  Follow-through buying today lifted it above $4200 but it is consolidating ahead of the US open. Silver initially traded below Monday’s low to draw a little closer to $60.  It recovered and settled near $61.50, the help of late buying.  It reached about $61.65 today before stalling and is now below $61. Gold is off almost 5.6% this month and silver has lost about 8.6%. 

• November WTI broke down late in North America and fell to almost $89, a new four-day low. It briefly slipped through last week’s lows (~$88.65-$88.70) but is now back above $90. The next technical target could be the around $84.50 next if last week’s lows are convincingly violated.  Saudi pipeline figures reported, the further draw down of US Strategic Petroleum Reserves, added pressure on other countries to at least make good on their early commitments on tapping strategic supplies weighed on prices. 

Data

• The US reports personal income and consumption and deflators. It will include annual revisions for GDP and personal income.  There is also a methodological change in the calculations of the deflators. The changes focus on portfolio management and investment advice, legal services, and computer and software accessories.  The changes are expected to show slightly less price pressures. After slowing in June and July, personal consumption is expected to have jumped back strongly in August.  The median forecast in Bloomberg’s survey is for a 0.9% increase, which would match the largest this year, which was the most since December 2024. Adjusted for inflation, the 0.5% increase that is anticipated, would match the strongest since March 2025. The ADP private sector employment estimate for September is due.  The median forecast in Bloomberg’s survey is for 74k after 38k in August. Through August, ADP estimated the US private sector added an average of 68k jobs a month. The BLS estimate says the US private sector added an average of 84k jobs a month. Last year, ADP estimated an average of almost 64k jobs a month and the BLS, 68k.

• Germany reported a 1.3% jump in August retail sales, which cut the year-over-year decline to 0.4% from -2.2% in July.  September unemployment was steady at 6.4%. The German states reported September CPI figures, and the national reading is due shortly. The EU harmonized measure is seen rising by 0.5%, which will lift the year-over-year rate to 3.2% from 2.9%. Separately, France reported a 0.4% decline in the EU-harmonized CPI, but due to the base effect (-1.1% in September 2025), the year-over-year pace accelerated to 3.4% (from 2.6%). Tomorrow, the September aggregate eurozone CPI is due.  It is seen rising 0.5% for a 3.7% year-over-year rise (from 3.2%). The core rate is seen edging up to 2.5% from 2.4%. France also reported consumer spending fell by 0.5% in August after revised 0.4% (initially 0.5%) increase in July. France unveils next year’s budget tomorrow and the French 10-year premium over Germany is a little more than 120 bp.  

• The UK revised Q2 GDP estimate to 0.5% from 0.4%. Better net exports seemed to be the driver.   The swaps market remains confident that the Bank of England will hike the base rate at its next meeting in early November. The market has nearly 100 bp discounted through the first half of next year. 

• A day after the Reserve Bank of Australia’s fourth rate hike of the year, August CPI was released.  It rose 0.4% after a 1% jump in July.  The year-over-year rate rose to 4.0% from 3.5%. The trimmed mean rose 0.2%, leaving the year-over-year rate steady at 3.6%. Separately, it reported a dramatic 6.1% decline in building approvals and a 0.6% increase in private sector credit extension (the year-over-year pace was unchanged at a lofty 8.4%). 

• Japan reported a 1.2% decline in August retail sales after a 2.1% rise in July. August industrial output unexpectedly fell 1.7% following the 0.2% decline in July. The median forecast in Bloomberg’s survey was for a 1.3% increase. The Japanese economy grew by about 1.6% annualized in H1 26 and is seen slowing to 1% in H2.  The swaps market had about a 40% chance of a hike at the next BOJ meeting in late October discounted on Monday and it has been halved now. 

• China’s PMI was ticked up and this coupled with the new modest stimulus efforts may help boost sentiment after the holiday with closes mainland market starting tomorrow and re-opening next Thursday, October 8. The manufacturing PMI did poke above 50 (50.1 vs. 49.8). It is the first reading above the 50 boom/bust level since June.  The slowing of the non-manufacturing sector PMI rose to 50.2 from 49.0, which matches the highest reading since June 2025.  The composite edged up to 50.7 from 49.5. It had not been above 50 since June and finished last year at 50.7. The RatingDog version runs a little firmer and was narrowly mixed. The composite stands at 52.4 from 52.1. It was at 51.3 at the end of 2025.

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