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CAD
The loonie has largely managed to hold on to last week’s gains through the weekend and into the Monday session, with USDCAD currently trading near its one-month lows. The move higher for the loonie has been well supported by better news out of China and, in particular, the grind higher in oil prices with WTI continuing to push higher, having broken through $90 per barrel last week. The bout of oil strength has come as several OPEC+ countries, notably Russia and Saudi Arabia, continue to squeeze output in an effort to drive up prices. Given this, markets will be paying close attention to a speech by the Saudi Kingdom’s Energy Minister Abdulaziz bin Salman later today with an eye to any hints for the likely path for oil, with the critical psychological level of $100 dollars per barrel coming into sight according to some analysts. Outside this, the week’s notable Canadian release is due to be delivered tomorrow, in the form of CPI data. Given the alarming slowdown in economic growth seen in recent GDP figures, we think the bar is high for this print to convince the BoC that more hiking is needed. Nevertheless, the expected tick up in the headline rate from 3.3% to 3.8% might just set some nerves on edge at the BoC regardless.
USD
The dollar notched its ninth successive week of gains last week, rallying 0.45% to trade above the 105 handle. Unlike in recent weeks, however, the DXY index doesn’t fully represent how the broad dollar traded, with returns against the greenback generally split across both the G10 and expanded majors. While the dollar continued to make inroads against growth and yield sensitive currencies, such as European FX, it lost ground against commodity currencies and those generally within China’s economic sphere as oil broke through $90 per barrel and Chinese growth data showed signs of optimism.
The two-speed dollar continues this morning with most of the G10 trading higher against the greenback, led by AUD and NZD despite a mixed Asian trading session. Meanwhile, EURUSD is trading flat just above its year-to-date lows, and Scandi FX starting the week under renewed pressure. However, the moves at the start of what is set to be an incredibly busy data week for markets have been marginal. From Wednesday onwards, markets will have to digest 9 central bank decisions from economies within the expanded majors, including the Federal Reserve, Bank of England, and Bank of Japan, while Friday also brings about the release of flash PMIs from Europe and the US for September. Given the sustained period of USD appreciation has been underpinned by US economic outperformance and widening rate differentials as a result, the question on everyone’s lips this week is whether the dollar rally is about to lose steam or not. We think there may be further to run as the Federal Reserve will be able to sell the “higher for longer” narrative more effectively than peer central banks. While we don’t expect the Fed to raise rates, alongside the broad market and economist consensus, we do expect the dot plot to retain its marginal tightening bias for 2023, while recent growth data suggests fewer cuts projected in 2024. Furthermore, we expect Friday’s flash PMIs to reinforce the US exceptionalism narrative, especially after August’s ISM services measure showed considerably more strength alongside overall retail sales. On the whole, market volatility is likely to be limited heading into a busy second half of the week, but come the weekend we expect to see the dollar sit marginally higher against most of the G10.
EUR
Last week’s dovish rate hike from the ECB saw EURUSD punch through several key resistance levels, plumbing depths not seen since early June. Whilst a modest uptick in the euro has subsequently materialised, the dollar has mostly held onto its gains against the single currency over the weekend and into this morning’s trading. A notable risk event for the pair this week is likely to be the Fed decision on Wednesday, though with a hold widely expected, the danger here is more that Chair Powell says something he shouldn’t, or that the SEPs reveal an unanticipated shift in Fed members projections for the US economy. It is Friday’s flash PMI releases, however, that are likely to be key for EURUSD. While another round of sub-50 readings are expected out of the eurozone, the pace of the contraction is set to slow. Alongside an expected slight slowdown in US economic growth conditions, a consensus print in the PMIs is likely to keep EURUSD above its year-to-date highs, however, we note that the risks are tilted to the downside for the eurozone readings. If realised, this will likely unlock the 1.05s on the most liquid currency pair, pushing the DXY index higher into the weekend.
GBP
A relatively quiet start to the week looks in store for sterling traders, before CPI data, a Bank of England policy decision and flash PMIs are all set to be released from Wednesday onwards. Expectations suggest the pace of disinflation is set to accelerate, along with a similar slowing for the UK economy. Despite this the BoE is still set to raise rates this month, though likely for the last time, in line with our long standing call for Bank Rate. It is notable that markets have increasingly aligned with this view over the summer period, a shift that has now seen sterling progressively lose ground against the dollar, with cable now trading at levels not plumbed since early June, whilst the pound has managed to remain largely range bound through that period against the euro. Whether or not this week’s news can break these long standing trends remains to be seen, though we think some upside for sterling should be on the cards as a more positive real rates outlook materialises alongside a relative growth story that favours the UK against the eurozone. Until then though, UK watchers will have to make do with Rightmove house price data for entertainment. Released just after midnight, the latest numbers should provide some reassurance for British homeowners with a string of releases last week suggesting that the UK housing market was looking increasingly wobbly. Granted Rightmove data still showed a 0.4% YoY fall in asking prices in September, but the four tenths uptick MoM partially reversed the 1.9% fall from August suggesting that at least some of the weakness of recent releases reflects a summer effect rather than signs of anything more worrying.