News & Analysis


After two consecutive trading days of losses, Tuesday saw the Canadian dollar appreciate by 0.6% against the US dollar as cross-asset price action struck a more positive tone. Aside from improved risk sentiment, the loonie also benefited from a rise in crude oil prices to $81 per barrel – a rally that is being extended early this morning as Europe’s plans to delay the implementation of the proposed price cap on Russian crude . Comparatively, economic data had virtually no impact on the currency yesterday as October’s retail sales came in at -0.5% month-on-month, exactly in line with expectations. Today, given the lack of Canada-specific events on the economic calendar, price action in USDCAD will likely be determined by US data releases.


The dollar fell against every G10 currency on Tuesday, ending a three-day winning streak with declines in the DXY index reaching two thirds of a percent. Most of the losses can be attributed to positive risk sentiment as traders trimmed Fed bets. This not only boosted equities globally, but enticed investors to leave the dollar’s safe embrace. The downside in the greenback was amplified when the Richmond Fed’s manufacturing index missed expectations, printing at -9, signalling dampened prospects for industrial production. The risk rally has persisted overnight as traders turn a blind eye to the reimposition of lockdown measures in major Chinese cities and instead focus on the prospect of loosening tech regulations. The extent to which this can remain a prominent driver of the risk rally is likely limited, especially as the market focus turns towards the release of the Fed’s latest meeting minutes. Although likely to indicate a slowdown in the pace of the tightening cycle, especially following October’s softer CPI release, the meeting minutes will continue to show the Fed’s resolve in keeping the policy rate in restrictive territory for a significant period of time. This should, all things considered, help deflate the risk rally and see the dollar stabilise at a minimum heading into the Thanksgiving weekend. Prior to the FOMC minutes, which are released at 19:00 GMT, flash PMIs for November at 14:45 GMT will give markets a health check on the state of the US economy. The manufacturing number will be in specific focus after a number of metrics show a significant slowdown in that sector.


The recent sequence of positive surprises in eurozone data continued yesterday as consumer confidence for November printed at -23.3, up from October’s reading of -27.5 and above expectations of -26.0. Euro bulls will be hoping that the recent trend in eurozone data continues today as November’s flash PMIs are released between 08:00 and 09:00 GMT, however, the first signs from the French data suggests the party may be over. Although the manufacturing sector showed surprising resilience with a print of 49.1 vs expectation of 47.0, the services sector, which was previously the shining light among the eurozone economy, is now starting to contract with a reading of 49.4. Next up, at 08:30 GMT, Germany’s manufacturing sector will be in focus ahead of the eurozone composite readings at 09:00 GMT. Although the French data is initially weaker-than-expected, the data is unlikely to have a large negative impact on the euro as it broadly confirms what markets know already; the eurozone economy is one of the first to enter a recession.


The pound got wrapped up in the rejuvenated risk rally yesterday. The more supportive cross-asset backdrop resulted in GBPUSD recording gains of 0.5%, reversing Monday’s losses in what was a relatively uninspiring day in FX markets. Today, price action in the pound is likely to be more illustrative of underlying fundamentals as traders face-up to the latest flash PMI reading for November at 09:30 GMT. It is worth noting that the pound slumped in previous periods where markets were reminded of the UK’s precarious economic outlook. On top of the PMI release, some focus will also be given to Chancellor Hunt’s testimony this afternoon before the Treasury Committee. However, beyond analysis on the fiscal metrics and relaying the government’s commitment to balance the books over a five year horizon to markets, headlines from this event are unlikely to induce too much volatility into the pound.

FX Elsewhere

The Kiwi dollar jumped 0.64% overnight as the Reserve Bank of New Zealand upped the pace of its hiking cycle with a 75bps increase in the Official Cash Rate to 4.25%. However, the initial rally from the largest rate increase since the OCR was introduced in 1999 was partly faded as Governor Orr outlined that the stark trade-off between tackling inflation and avoiding a recession that faces many developed market central banks. Accompanying the rate hike was the Bank’s projection that the economy would slip into recession in mid-2023, while Bank staff also upgraded their assessment of the decline in house prices with the forecasts now projecting a 20% drop from the November 2021 high. Despite the stark growth warnings, the Kiwi dollar continues to lead the broad rally within the G10 space with the rally driven by a 19bps jump in the 2-year bond yield.



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