News & Analysis


The loonie fell a third of a percent against the dollar on Friday, dragged down by a fall in crude oil to the $80 handle after traders received news of a short-term supply boost. Canadian house prices continued to fall in October, with Teranet/National Bank’s estimates pointing to a 1.5% cut to prices over the course of the month. On a year-over-year basis, house prices are still up 6.6%, but that figure is well below the 19% peak witnessed in April of this year. Industrial product and raw materials prices both beat expectations and accelerated rapidly from September, a hiccup in the overall deceleration in goods inflation that Canada has had over the course of the last few months. This morning, with equity futures trading in the red and commodities also slumping further on negative growth headlines coming out of China, the loonie is back under pressure, although losses are more limited in CAD than other higher-beta G10 currencies.


The broad dollar strengthened one third of a percent on Friday, supported by hawkish Fed commentary and rising US bond yields. President Collins of the Boston Fed reiterated the need for additional rate hikes, noting that policy will need to remain restrictive “for some time.” Collins’ comments led to a slight uptick in money market pricing for December, which now implies a base case of 50bps with a 20% probability of 75bps. On the data front, home sales slightly beat expectations, but still posted a sharp decline of -5.9% on the month, while the leading indicator index fell 0.8%, double the loss expected by economists .Upward momentum in the dollar continues this morning as Shijiazhuang, a city of 11m people outside of Beijing and seen as the guinea pig for China’s loosening Covid zero stance, has had to shutdown schools and universities while asking residents to stay at home for 5 days. These signs that exiting the zero covid policy stance remains more difficult than markets expected last week, primarily due to the low vaccination take-up especially among elderly, has weighed on Chinese stocks overnight and introduced fresh cross-asset headwinds this morning. These developments have taken some of the air out of the risk-on rally and enabled an extension in the dollar’s consolidation. As we highlighted in our week ahead section, the dollar’s decline may not have further to run as the next leg lower likely requires active short positioning. CFTC data from last week shows that price action was largely defined by long positions being trimmed as the non-commercial position in the FINEX USD future was trimmed by 3,339 contracts but still remained net long with 26,854 contracts. Today, with very little set for release, the moves seen overnight are likely to be sustained.


Valuations came into play for the single currency last week, resulting in the level of realised volatility in EURUSD reducing somewhat as the pair found new ranges. At the start of this week, FX traders are still respecting the ranges carved out in last week’s session, but given the renewed headwinds to the cross-asset risk environment, the euro has fallen 0.6% overnight and is set to start testing last week’s support level. The data calendar is providing very little assistance to the euro thus far this morning, as German PPI data suggests more goods disinflation may be in the pipeline after printing substantially below expectations at -4.2% MoM, while very little is scheduled for the remainder of the day beyond commentary from ECB officials, which is having a lesser impact on market pricing given the consistent and cohesive hawkish message they have delivered to date.


In a similar fashion to the euro, the pound has fallen over half a percentage point overnight as traders continue to adjust positions as the overarching risk backdrop changes. The fluid macro backdrop, along with thinning liquidity conditions, is keeping volatility historically high, albeit at levels below the previous fortnight’s peak. This week, idiosyncratic drivers of the pound are few and far between, with just Chancellor Hunt’s testimony to the Treasury Committee, BoE Chief Economist Pill’s speech about returning inflation to target, and the flash PMIs for November standing out in the calendar on Wednesday.



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