News & Analysis


For the third trading session in a row, Tuesday’s price action in USDCAD was choppy intraday but relatively directionless overall at the close. Like the day before, we had USD weakness through the Asian and European sessions that reversed once North American traders hit their desks, despite the lack of a fundamental trigger. In a dollar rally like the one we’ve witnessed these last few weeks, it’s quite unusual for USDCAD to sustain its levels for this long. On a technical basis, the relative strength index (RSI) suggests that the pair has been in overbought territory for the longest period since last September, and before that, since March 2020. Nevertheless, the loonie has managed to maintain this short term equilibrium, as many traders are waiting for key data and central bank news before engaging in new directional bets. That could change soon, however, depending on whether Fed Chair Powell eases back or doubles down on his hawkish policy stance at Jackson Hole this Friday. Before then, Canada’s retail sales report released at 08:30 EST / 13:30 BST today will give us the latest update on the health of consumer spending. Economists are in line with StatsCan’s preliminary estimate, expecting flat sales in June from the month before. The report will help to inform the GDP release on September 1st, which will be the final key data point ahead of the next Bank of Canada meeting. With jobs data suggesting that discretionary spending-sensitive industries are contracting, and inflation figures saying otherwise,June’s retail sales report should help to clear this up.


In a similar vein to Monday’s session, the overnight slump in the greenback was quickly reversed in the US session later in the day as selected tech stocks once again stood out and bond market volatility remained high. However, the catalyst of the dollar’s U-turn wasn’t necessarily as pronounced as it was on Monday. Instead, the limited news and big rotation in cross-asset price action is suggestive of typical summer liquidity conditions, with measures of participation in most major currency pairs outside of JPY and CNY printing below-average. Today, with the dollar once again offered overnight following a positive session for APAC equities outside of the CSI 300 and continued pushback from the Chinese central bank, the question is if the turnaround trend visible throughout this week will occur once again today. Unlike in previous sessions, however, the data calendar is likely to play a more prominent role in whether this occurs. Not only do traders receive a  suite of flash PMIs out of Europe and America to contend with, but also earnings from the market’s star child Nvidia post-market. The releases will test the US exceptionalism story, in terms of both growth conditions and stock outperformance year-to-date, which has been a key narrative underpinning the dollar at current levels.


Caught in no-man’s land between where nominal and inflation adjusted yield spread estimates would place it, EURUSD remains a relatively unexciting currency pair on the whole. Although, it is notable that yesterday it did drop close to half a percent to briefly touch the lowest level in two-months as eurozone yields fell across the belly of the curve. While a bull flattening in yield curves is normally a bullish signal for investors, and indeed yesterday’s fixed income price action did correspond with strength in European equities, this wasn’t the case for the single currency which continues to be bogged down by recession concerns following signs of weakness in Q2’s advance GDP readings earlier in the month. It’s in this context that today’s preliminary August PMIs print, the last of its kind before the ECB’s September meeting. With the manufacturing recession well-known at this point, investors will be paying close attention to how growth conditions are holding up within the services sector, especially as this is where the bulk of the ECB’s inflation problem is currently stemming. Signs that the consumer is ailing under the pressure of higher prices, and continued evidence that this is restricting firms ability to pass on higher costs as was reported back in July, will confirm our view that the ECB won’t hike rates once again in September. This view is currently shared wholeheartedly by markets, with swap traders pricing the next decision as a coin flip between hiking and holding. As such, signs of weakness in today’s preliminary PMIs will undoubtedly weigh on the odds of a hike and drag EURUSD lower alongside it.


Whilst yesterday’s market action left the pound to finish the session down 0.2pp against the dollar on the day and up a similar amount on the euro, the most notable price action came in bond markets instead. Both 2 year and 10 year Gilt yields were trimmed by 9bp, naturally weighing on sterling through the day. The front-end move was notably larger than falls seen in other government bond yields on the day, and whilst this is consistent with the government borrowing figures that undershot expectations yesterday, given summer trading conditions and the fact that Gilt volatility has generally outstripped peers in recent months we would be wary of reading too much into this move for now. Coming up though, and following last week’s mixed bag of data, sterling watchers will be looking towards PMI data out at 9:30 BST for more clarity on the outlook for the UK economy. Current projections suggest that the headline measure should indicate the UK economy continues to expand, albeit marginally. The headline reading is expected to print just above 50, consistent with recent flash GDP figures, showing the UK’s soft economic expansion of 0.2% in Q2 will continue into the third quarter. More important for many though will be hints included in the report on the state of the labour market. Crucially with June weekly earnings data surprising to the upside last week, showing growth of 8.2%, policymakers will be hoping for signs that forward looking wage pressures are beginning to subside.



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