Moody's Did Not Downgrade France and Peripheral Premiums are Narrower, but the Euro Struggles to Find Traction

There are two impulses today. First, defying expectations, Moody’s did not downgrade its assessment of French credit, which remains above S&P and Fitch’s ratings.  With a show of force by the government, French protests were less violent.  French bonds have rallied and the peripheral premium has narrowed.  Yet, the euro has found little meaningful traction.  Second, and also defying expectations, Brazilian President Lula appears to have beaten Bolsonaro in a nailbiter.  In the futures market the Brazilian real has been sold. Bonds and equities are expected to follow suit.  

The US dollar is mostly firmer to start the new week, which features the FOMC meeting, the first estimate of Q3 GDP, and a series of big tech earnings. Beijing, seemingly undeterred, set the dollar’s reference rate at a new high since mid-2022.  Four other G10 central banks meet this week and the market is most confident that the Reserve Bank of New Zealand and the Bank of Canada are most likely to hike, while the Fed, ECB, and BOJ are widely expected to standpat, but hike again in December. 

Prices 

G10

• After testing the upper end of its recent range on Thursday, the euro flirted with the lower end of its range on Friday, ahead of the weekend. That range is roughly $1.1185-$1.1270. The euro comes into today with a three-day loss in tow. Despite the fact that Moody’s did not downgrade France ahead of the weekend, the protests for less violent, and the peripheral premiums over Germany are narrower, the euro has found little traction. It is in a little more than a quarter-cent range above $1.12, where options for about a billion euros expire today.  Another set of options for a little more than 1 bln euros at $1.1250 also expire today. Last week's low was near $1.1185 and a break of $1.1175 could signal a retest on the year's low and retracement objective, a little above $1.11.

• With the pre-weekend move, the greenback nearly met the (50%) retracement of the rally from the early September low against the yen, a little below JPY153. The retracement was found near JPY156. Firmer US rates seemed to help fuel the dollar’s recovery back above JPY157. The dollar held above JPY156.65 today and is making new session highs in late European morning turnover near JPY157.35. Initial resistance is seen around JPY157.50-65.  

• Sterling posted an inside day ahead of the weekend. It traded between about $1.3365 and almost $1.3410. It looks tired after rallying from around $1.3135 on October 14 to last week’s high near $1.3420. It has been sold to around $1.3345 in Europe today. The initial losses could extend toward $1.3280-$1.3300. Options for about GBP355 today and another set for GBP455 mln tomorrow at $1.33 expire.  

• The pendulum of expectations swung toward a Bank of Canada rate hike this week helped fuel the Canadian dollar recovery last week. Indeed, it has traded higher for the past seven sessions, the longest rally since March 2022.  The greenback nearly met the (61.8%) retracement of its rally from September 8 low near CAD1.3760. The retracement was about CAD1.3965.  Despite comments from the Trump administration that a trade deal with Canada may be close, the Canadian dollar has pulled back today.  The US dollar reached CAD1.4050 before pulling back to test CAD1.40. The US two-year premium over Canada narrowed to about 133 bp at the end of last week, the least since mid-September. It peaked near 160 bp on October 9. 

• The Australian dollar traded firmly before the weekend. It was the first session since September 28 that the Aussie did not trade below $0.7000.  It finished firmly.  It held above $0.7020 today and has edged up to new session highs near $0.7040 in the European morning. A move above $0.7050-$0.7065 would strengthen the technical tone. 

EM 

• After reaching a new high since last September against the Mexican peso on October 22 (almost MXN18.86), the greenback consolidated ahead of the weekend. The Brazilian election news initially weighed on the peso, and the dollar rose to MXN18.76 after it settled before the weekend slightly below MXN18.66. It stabilized and held above the MXN18.6370-MXN18.6430 lows set in the previous two sessions. The dollar settled ahead of the weekend near BRL4.9790.  It was trading near BRL5.20 before the outcome of the first round of the presidential election.  

• Before the weekend, the offshore yuan rose to its best level since June 2022. The dollar finished the week straddling CNH6.67. It brought this year’s gain to about 4.6% and made it one of the strongest currencies this year. It is up around 9% this year against the euro.  The dollar ground down to CNH6.6670 so far today. The PBOC set the dollar’s reference rate at CNY6.7162 today (CNY6.7180 before the weekend). 

• The dollar was little changed against the Indian rupee last week. The greenback‘s gain in the last two sessions offset the weakness seen in the first half of last week.  The rupee traded heavier today, and the dollar rebounded a little more than 0.35% to settle near INR95.19, its highest close in eight sessions. 

Other Markets

• The S&P 500 and Nasdaq Composite settled above opening levels before the weekend, and the Philadelphia Stock Exchange Semiconductor Index gained nearly 1%.  Asia Pacific equities were mixed today.  Japanese and Chinese market themselves were mixed, and tech-sensitive Taiwan and South Korean equities fell over 1%. Europe’s Stoxx 600 is trying to snap a two-day downdraft and is up about 0.4%. US index futures are up 0.3-0.5%. 

• North American yields rose before the weekend. Still, the US 10-year yield Benchmark 10-year yield posted the first weekly close below 5% since mid-September. Core European rates today are mostly firmer, but the peripheral yields, including France, are lower and the premiums have narrowed.  The French 10-year premium over Germany is about 10 bp narrower around 156 bp. The 10-year US Treasury yield is flat, slightly below 5%. 

• Gold initially dropped to almost $3975 ahead of the weekend, its lowest level since mid-July. It had been turned back from the approach of the 20-day moving average (~$4150) the previous session. It steadied but could not re-enter the previous day’s range when the low was around $4021. It settled below the lower Bollinger band for the second consecutive session. It is nearly $4021 today.  It is toying with the lower Bollinger Band in the Europe. Silver recorded a new low for the year ahead of the weekend, near $53. Despite a slight recovery, it was unable to re-enter the previous day's range, missing the low of nearly $54.50. It is trading quietly today between about $53.60 and $54.40. 

• December WTI jumped around $3 at the end of last week and set a new contract high near $103.30.  It was the fourth consecutive weekly advance, and, in that run, it rose by nearly 16.5%. It is consolidating today between about $100.60 and $102.60. 

Data

• A week that features the FOMC meeting and the first estimate of US Q3 GDP begins slowly with September Chicago Fed’s National Activity Index and the October Dallas manufacturing survey. Today’s reports typically do not move the markets. The median forecast in Bloomberg’s survey has edged up to 3.0% for Q3 GDP. The Atlanta Fed GDP tracker is 3.5%. There is little doubt in the market’s mind that the Fed stands pat this week, but hikes at the December meeting. Corporate earnings from Microsoft and Alphabet are due after the FOMC meeting concludes on Wednesday and Amazon, Intel, and SanDisk will be announced Thursday. 

• Germany’s IFO October investor survey was little changed. The current assessment slipped for the first time in three months to 88.8 vs. 89.5 in September).  It was at 85.6 at the end of last year. The expectations component edged up for the sixth consecutive month.  It is at 91.6 (vs. 90.4).  It was at 89.7 at the end of 2025. The reading for the overall business climate is 90.2 (vs. 89.9). It was 87.6 at the end of last year. 

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