News & Analysis


Price action in the loonie was fairly lacklustre yesterday as Government of Canada bond yields roughly tracked US Treasuries and the downturn in equity benchmarks proved limited. This morning, amid a renewed risk-on environment, the loonie has more than reversed yesterday’s marginal losses and is edging closer towards last week’s multi-month high. Today, the longevity of the cross-asset risk on environment will be the most influential driver for the Canadian dollar, with just manufacturing and wholesale trade sales data and existing home sales data in the calendar.


The shakeout in long USD positioning last week proved too aggressive for Fed officials yesterday as they hit the wires with a uniform message that a downshift in the pace of the tightening cycle doesn’t suggest that the end is near. While the degree of aggression in which this message was delivered varied among Fed officials, with Governor Waller pushing back on market price action more aggressively than Vice Chair Brainard later in the day, the overarching theme in a relatively light data session saw traders re-engage in some USD length. This morning, however, the dollar’s rollercoaster ride continues as risk conditions U-turn more than the previous UK government. Despite uninspiring Chinese data overnight, equity markets had a strong Asian session as officials in China continue to show increased sensitivity to the lacklustre performance of the economy and the ailing housing sector. Coupled with signs that US-Sino relations have improved somewhat after President Xi and Biden’s side room meeting ahead of the G20 summit in Bali today and arguably more moderate language from Vice Chair Brainard than many expected, markets start the European session with a distinct risk-on bias yet again. With front-end US Treasury yields falling back towards their post-CPI lows, which is only emboldening risk-on conditions, much of today’s focus will be on commentary from additional Fed members as 2023 voting member Patrick Harker and Vice Chair for Supervision Michael Barr are set to hit the wires. Outside of this, commentary from the ongoing G20 summit in Bali and US PPI inflation data for October will be closely monitored.


Despite suffering early losses, the single currency closed out yesterday’s session relatively flat as positive surprises in industrial production data earlier in the day combined with continued hawkish commentary from prominent ECB officials and a moderation in the broad US dollar following Vice Chair Brainard’s comments. The most notable comments from the ECB’s Governing Council came from Vice President Luis de Guindos, who stated that incoming wage data and recent wage agreements indicate that wage dynamics may be picking up. This poses a threat to the ECB even though the eurozone economy is entering its projected recession, and de Guindos’ explicit reference to these dynamics helped to keep near-term pricing of the ECB’s policy path firm. Today, euro bulls will be hoping that the German ZEW survey data at 10:00 BST start to improve on the back of falling energy prices, while the preliminary release of eurozone growth and employment data for Q3 at the same time will also draw some focus in order to assess the momentum in which the region’s economy is entering the treacherous winter period. Should the data fall in line with expectations, however, price action in the euro will continue to be a product of broader risk conditions and amid the squeeze in the dollar, further upside is likely.


As mentioned in yesterday’s morning report, the pound’s aggressive rally towards the back end of last week meant its valuations left it vulnerable to a retracement in the early parts of this week as investors look to re-engage in some long USD positions. That is exactly what occurred in yesterday’s session, with the pound shedding around 0.4% on the day against the dollar. Although a broadly stronger dollar was at play, the pound’s outsized losses were clearly visible in the GBPEUR rate as it fell close to 0.6%. This morning, with the broad dollar’s fortunes turning yet again, sterling has more than recouped yesterday’s losses as it sits 0.5% higher. This morning’s release of September’s Labour market data is likely clearing the path higher for GBP traders after average weekly earnings ex-bonus grew from 5.5% in August to 5.7% on a 3M/YoY basis. The stronger wage growth, driven by higher pay settlements in the private sector (6.6% 3M/YoY vs 2.2% for the public sector), is exactly what the BoE singled out as an upside risk to its forecasts earlier this month, reinforcing the prospect of another outsized rate hike in December. In our view, today’s labour market data, despite showing a contraction in net employment and signs of labour demand falling, reinforces the prospect of another 50bp hike to 3.5% by year-end. Should October’s report, released two days prior to the December 15th meeting, show firm wage-setting behaviours along with limited slack reappearing in the labour market despite deteriorating business conditions, risks may grow that the BoE needs to hike a further 75bps.



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