The US dollar ruled in September. Fear of the Fed fueled broad based US dollar demand, sent Wall Street stocks tumbling until the last few days of the month.
That’s when the British pound took over the driver’s seat for global market direction.
The UK government released a “mini budget” that included tax cuts for high income earners while simultaneously boosting spending.
Traders were seriously unimpressed and voted with their wallets. GBPUSD plunged from 1.1274 at the peak on Friday September 23, before the budget, to 1.0349 at the trough in the wake of the news on September 26. British government bond prices collapsed sending the 10-year Gilt yield to 4.215%, the highest level in a dozen years. The US 10-year Treasury yield climbed above 4.0% in sympathy.
The soaring Gilt yields forced the Bank of England to intervene in the bond market to prevent UK pension plans going bankrupt from margin calls. The BoE actions saved the day and sparked a steep GBPUSD rally and knocked the US dollar lower against the other G-10 currencies, in the process.
The Bank of Japan was the first member of the intervention club on September 22, when it spent $19.7 billion to drive USDJPY below 145.00. The money doesn’t seem to be well spent as USDJPY traded above 145.00 in the first week of October.
October is shaping up to be a volatile month with the US interest rate outlook, the war in Ukraine, and oil prices dominating discussions under a cloud of geopolitical tensions in Asia.
The USD and Federal Reserve
The US dollar rallied steadily for most of September and is likely to consolidate those gains in October, while maintaining a bullish bias.
The Fed hiked rates 75 bps to 3.25% on September 21. That hike was largely expected, however projections for further large rate increases until 2023, caught some players off guard. The US dollar rally was further underpinned by lower growth and higher unemployment forecasts.
October began with optimistic (delusional?) traders speculating that after a couple of weak and relatively minor data points, the Fed would pivot sooner than expected. The US dollar retreated but those gains disappeared after Fed policymakers reiterated that their focus was on lowering inflation. The next FOMC meeting isn’t until November 2, which suggests the Pivot, No-Pivot theme will drive FX and equity market direction for all of October.
The Canadian Dollar and Bank of Canada
The Canadian dollar lost 4.0% in September and closed at a USDCAD level of 1.3833. The currency did not get any lasting benefit after the Bank of Canada (BoC) raised the overnight rate by 75 basis points to 3.25%, on September 7. The news was expected and the BoC warned there would be more rate hikes.
Governor Tiff Macklem repeated the warning on October 3, telling a Halifax audience “Simply put, there is more to be done. We will need additional information before we consider moving to a more finely balanced decision-by-decision approach.” His words did not have any impact on the Canadian dollar since he didn’t say anything new. The BoC is widely expected to hike rates by another 75 bps on October 26.
USDCAD is expected to trade with a bullish bias inside a 1.3450-1.3850 range during the month,