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Global risk assets are bid on the view that this week’s Trump-Xi meeting will be a positive one. A 25bp Fed cut on Wednesday should also help the tone, but that is very much priced in. With the People’s Bank of China continuing to fix USD/CNY lower, we favour a mild downside bias to the US dollar at the start of the week
USD: Demand for EM Could Weigh on the Dollar
Risk assets start the week in a positive mood. Weekend reports suggest the US and China have found common ground on topics like the sale of TikTok, soybean purchases, and tariffs. The view here would be that the meeting between US President Donald Trump and Chinese President Xi Jinping on Thursday might see a formal agreement on these areas and enact a further delay of those severe 125/145% mutual tariff levels threatened in April.
Probably most important will be what China does with its planned export controls on rare earths. A prolonged delay here of, say, one year would very much be welcomed by the markets. Global equity markets are rallying on what they see as a likely extension of the US-China trade truce, and the risk-sensitive currencies of the Australian and New Zealand dollars lead today’s gains in G10 FX.
Assuming the Trump-Xi meeting delivers on these bullish expectations, the dollar might face a slightly negative backdrop. But there are also rate meetings this week in the US, the eurozone, Japan, and Canada. We preview the FOMC meeting here, where another 25bp rate cut is expected.
Unlike in September, dollar positioning is now better balanced, and the currency does not have to rally too far should Federal Reserve Chair Jerome Powell express any latent fear over inflation. This, however, looks unlikely after last week’s release of softer September CPI data.
On the subject of the Fed, US Treasury Secretary Scott Bessent has announced the shortlist of five candidates for the next Fed Chair. The surprise package on the list is BlackRock’s Rick Rieder, who presumably would be welcomed by the market given his background in fixed income markets.
Another development of note to us this morning is the People’s Bank of China continuing to fix USD/CNY lower. Is this just a gesture of goodwill ahead of Thursday’s Trump-Xi meeting, or a sign that China wants to grow its domestic demand, where a stronger renminbi would be more useful? Either way, a stronger renminbi is normally supportive for global EM currencies and a mild dollar negative.
Given the ongoing government shutdown, US data releases remain scarce this week. The betting market attaches a 49% probability that the shutdown lasts beyond 16 November. And it could be that 15 November becomes a key date, with Scott Bessent stating that the US military does not get paid after this point should the shutdown remain in place. The ongoing shutdown means we probably do not see the US third-quarter GDP this week, where consensus was for a reasonably strong 3.0% quarter-on-quarter annualised figure.
DXY is staying quite bid near 99 – largely because USD/JPY is bid on local politics and EUR/USD remains a little soggy. But the German Ifo could give EUR/USD a lift today and send DXT back to 98.50.
EUR: Focus on the Ifo Index
One might have thought EUR/USD would be performing a little better given the global risk environment. A US-China trade truce would be welcome news for global trade, allowing for some nascent optimism in business sentiment to extend. This was evident on Friday in the surprise uptick in the eurozone PMIs and countered the emerging pessimism that economists had been drawn to over the summer. Let’s see whether that’s followed up with a good German Ifo number this morning. Here, the expectations component – most closely linked with business investment – is expected to nudge back up to the 90 area.
Today also sees the European Central Bank release its consumer inflation expectations survey. The three-year figure is expected to remain flat at 2.5% and feed into a very neutral ECB meeting this Thursday. The bigger debate is probably left until the December meeting when the 2028 CPI forecast is released. A number sub 2.05 would open the door for the doves.
We’re surprised EUR/USD is not a little higher this morning, but we still have a slight preference towards the 1.1650 area in quiet markets.
JPY: A Potential Trump-Takaichi Meeting?
It has been suggested that President Trump could be meeting Japan’s new PM, Sanae Takaichi, during his Asia trip. What to do about USD/JPY? The White House would like it lower to correct the US trade deficit with Japan, while Takaichi’s presumed policies are yen negative, with pressure on the Bank of Japan not to raise rates. On that subject, there’s a BoJ rate meeting on Thursday, and the market now attaches only a 10% probability of a hike.
We can’t see what’s going to turn USD/JPY lower in the short term – until we get a broad dollar decline. However, we suspect Japanese policymakers would want to intervene and sell dollars were it to make it to the 155-160 area. For reference, the Japanese last sold USD/JPY near 160 in July 2024.
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