The loonie was one of the better performers in the G10 yesterday, slipping by a negligible amount against the dollar while most G10s fell hard. Just looking at open and close prices masks a substantial degree of intraday volatility, with the price chart looking more like a heartbeat monitor than a market. Following a quiet Asian session, European traders immediately began dumping CAD after arriving at their desks, and USDCAD trended upward until the start of the North American session. North American traders were far more bullish, and began buying the loonie en masse and pushing USDCAD down 1% within a two-hour span. That rally allowed CAD to briefly touch its strongest level in over a month, with the entire move syncing up once again almost perfectly with Canadian equities. Within a few hours, the bids fizzled out, and the currency was back where it started. The day’s price action was entirely driven by correlations with other risk assets and foreign developments, as no major Canadian headlines hit the wires. This morning, the bearish bias of European traders persists as front-end Treasury yields climb further. Unlike yesterday, however, the loonie may remain under pressure throughout the entirety of today’s session as the US data released could stoke renewed hawkish pricing of the Fed.
The dollar started to fight back in yesterday’s session. While the move started earlier in the day, the release of a stronger advanced Q2 GDP figure at 13:30 BST undoubtedly helped the greenback to continue its rally. The US economy expanded at a rate of 2.6% QoQ annualised vs expectations of 2.4% in the third quarter, boosted by stronger-than-expected consumption. Personal consumption printed 0.4 percentage points above expectations at 1.4%, although the figure still showed a slowdown from the 2% growth recorded in the second quarter. While the US GDP data is lagged, it still shows that the consumer, and growth conditions overall, are withstanding the Fed’s aggressive hiking cycle thus far. This helped allay fears that the slowdown in growth seen within the PMI data for October will drive the US economy into immediate recession as the sub-50 PMIs can now be viewed against a stronger pace of growth. Today, the US data calendar will likely take a more influential role in USD price action, as the employment cost index for Q3 is released alongside the PCE measure of inflation for September at 13:30 BST, while housing data and the final reading of the University of Michigan inflation expectations data for October are released at 15:00 BST. Strong readings across the inflation data and ECI will unlikely move the needle for next week’s meeting, but instead embolden expectations of a still hawkish message from Fed officials next week on the path for rates. The likely impact this will have on Fed pricing further out along the curve, coupled with expectations of a continuation in negative earnings reports in US stocks today, will likely see the dollar end the week on a stronger note than it started.
The ECB hiked rates by 75bps yesterday, readjusted the conditions of their TLTRO III programme, and stated that quantitative tightening plans won’t be discussed until December’s meeting. The decision predominantly fell in line with our base case, although for what it is worth we did favour reverse tiering to adjust the TLTRO III spill over instead of adjusting the lending conditions. Alongside the decision, President Lagarde remained stubbornly against providing much forward guidance for markets, although did state that the central bank had made “substantial progress” on normalising policy and stated that the top-end of the neutral rate isn’t necessarily the ECB’s terminal rate; in other words, the peak in the ECB’s hiking cycle could be above the estimated 1-2% neutral range. While this again fell in line with our base case, which sees the deposit rate rising from 1.5% currently to 2.25% by Q1 2023, it undershot market expectations and saw implied interest rates for the ECB fall from around 2.5% for that period closer towards our base case. Unlike the Bank of Canada decision, which reverberated throughout the cross-asset space and prompted a risk-on rally in markets, the ECB’s decision ultimately weighed on just the euro and sent it back below parity by the close of play. The reaction in the euro to the ECB’s decision highlights two things to us: 1) given the market base case for a pronounced recession in the eurozone in the coming months, the single currency remains heavy above the parity threshold unless risk conditions receive a sustained boost, and 2) the ECB isn’t as supportive for the euro as other central banks are to their respective currencies. Today, with the ECB communications blackout period ended, headline risks for the euro will be substantial as the usual “sources” stories start to filter through. Already, we’ve had unnamed officials clarify that December’s meeting to discuss QT plans won’t see the ECB announce a start date and ECB members Villeroy and Simkus highlight that the decision to hike 75bps yesterday is no indication that they will do the same in December. On top of that, markets will receive flash data on growth conditions for Q3 out of France, Spain and Germany today, along with flash October CPI reports. Already, data from France showed growth slowed considerably in Q3 from 0.5% QoQ to 0.2%, while regional inflation data in Germany came in hot, suggesting the national figure at 13:00 BST may print above expectations of 10.1%. Meanwhile, France’s flash CPI report saw headline inflation jump from 5.6% to 6.2% YoY; a 0.4 percentage point beat to expectations.
Sterling largely flew under the radar yesterday, despite falling 0.7% on the day. The pound’s moves were largely in line with that seen across the G10 space as the greenback bounced from its mid-week low. Outside of FX markets, pricing for next week’s BoE meeting has fallen considerably from the 200bps peak seen during the mini-budget whirlwind to just under 75bps now. Given the BoE’s recent proclivity to undershoot market expectations, short-term interest rate market participants are likely providing more credence to the prospect of a 50bp hike next week, which would be undeniably GBP negative. However, given the evolution of inflation data alone over the past month, and the fact that 3 members already favoured a 75bps hike at September’s meeting, we still look for a 75bps hike next week.