News & Analysis


Despite a substantial retracement in the broad US dollar in yesterday’s session, the loonie sat firmly in the middle of the G10 pack as its losses were stemmed by a limited drop in US equity benchmarks and a sustained rally in WTI above $87 per barrel following the news that OPEC+ were to cut oil production by the top-end of their estimated range – 2m barrels per day. Today, the loonie is likely to take its cues from how US fixed income trades, while a speech by Governor Macklem at the Halifax Chamber of Commerce at 16:50 BST/ 11:50 ET will also draw considerable attention.


After falling 1.88% in the first two days of the week, the broad dollar DXY index gritted its teeth and went on the offensive yesterday as the moderation in Treasury yields looked to have finally bottomed out at 4% on the 2-year and 3.55% on the 10-year. The rebound in Treasury yields soured the feel-good factor that had been in play for risk assets, while the data released also confirmed this pivot in the market narrative. After soft survey data from the past two days suggested that slack was opening up in the labour market and goods inflation continued to cool, the first bit of hard data on the US labour market suggested that pricing of a Fed pivot in response to the earlier data was far too pre-emptive. The ADP measure of private employment, which tends to be a very loose proxy of the net employment change in the payrolls data due out two days later,  exceeded both expectations and August’s upwardly revised reading with a print of 208k. With the ADP measure undershooting the NFP net employment figure by 88k jobs on average this year, and 165k on average over the past quarter, the data suggests that Friday’s jobs report will print strong enough to keep the Fed on its pre-set path to raising interest rates to 4% or above this year. Additionally, the ISM services measure, which we argue is a better measure of domestic inflation and growth than the export-orientated manufacturing sector, showed employment levels tick up and price pressures modestly fall relative to the manufacturing index. Ahead of Friday’s NFP data, however, the market remains reluctant to heavily buy into additional USD length. This is evident by overnight pricing which saw the US 2-year remain stable at 4.15% but equity futures in Europe and the US rise, helping to lift high-beta currencies and make another dent in the dollar. Today, the data calendar is a bit more sparse, with just initial jobless claims data out at 13:30 BST. However, there is a substantial uptick in the number of Fed speakers today with Mester, Evans, Cook, Kashkari and Waller all set to speak on economic and monetary conditions. We expect their tone to follow that of the Fed’s Mary Daly yesterday, who pushed back on the recent easing in financial conditions and said the Fed remains committed to taking monetary conditions into restrictive territory for some period of time, but will welcome a cooling in employment growth on Friday if it comes.


A large portion of Tuesday’s gains were eroded in yesterday’s session as the single currency dropped by just over a percentage point against the dollar upon closing, a slight moderation from the 1.5% loss achieved during the day. Downside in the single currency was driven by a pricing out of the Fed pivot story that had dominated newswires and price action at the start of the week. With downwards pressure still coming from Europe’s weak energy outlook, much of the upside in the single currency is dependent on the narrative surrounding the Fed, but we don’t believe it will bind in markets following Friday’s payrolls data. Unless there is a substantial increase in the participation rate such that upwards pressure on wage growth is released, that is. Today, focus turns back to economic releases on the continent, with the main event being the publication of the accounts of the ECB’s last decision at 12:30 BST. However, the informational content of the meeting minutes may provide less in terms of forward guidance than usual given the ECB is now taking a meeting-by-meeting approach.


The pound led losses in the G10 space yesterday, recording a drop of 1.28% on the day against the dollar, as it continues to exhibit much higher levels of volatility after the budget. While much was made in the media of Prime Minister Liz Truss’s Tory party conference speech, with the Telegraph claiming that it may have consolidated her position as leader of the Conservatives, ultimately it had very little market impact. Instead, the pound was solely driven by broader market developments, which remained risk negative. In this environment, traders were gifted the perfect excuse to sell the pound back to where its deteriorating economic fundamentals place it; a theme we continue to see overnight as the pound underperforms the broader G10 move. Today, the economic data calendar sparks back into life for sterling with the Bank of England’s decision maker panel data for September released at 09:30 BST and MPC member Jonathan Haskel speaking at 18:00 BST on ‘Restarting the future: how to fix the intangible economy’. A word of caution on the decision maker panel, however, as the survey’s cut-off date was September 15th, meaning we are unlikely to see how executives’ inflation expectations and growth outlooks have changed in response to the latest budget measures.



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