News & Analysis


Volatility in USDCAD was high on Monday, although the currency pair was hardly changed by the end of the North American session, breaking a 5-day streak of gains. Dollar weakness was the story throughout the Asian and European sessions, but a sharp reversal ensued despite the sparse data calendar. Risk sentiment was mixed in markets, but the big market theme was rise in US yields. US treasury yields have now reached their highest levels since 2007, widening their spreads against their Canadian counterparts. Currently, Canadian yields sit about 20 and 60bps below their American counterparts on 2-year and 10-year bonds. Crude oil traded on a weaker footing, but remains above $80 per barrel. Nothing today is scheduled for Canada, but Wednesday (Canada retail sales and global PMI data) and Friday (Powell and Lagarde at Jackson Hole) will be key for loonie traders this week.


The People’s Bank of China stepped up its defence of the onshore yuan this morning, increasing the counter-cyclical factor in its fixing to -1,111 pips, up from -880 yesterday and -1,041 on Friday. The spread in the daily fixing relative to analyst expectations was the largest since polls began in 2018 and occurred shortly after the central bank drained liquidity in offshore funding markets overnight, an act that sent the one-month Hibor rate to its highest level since 2018 and by doing so increased the cost of funding yuan shorts. The measures in FX markets to stem the bleed in the yuan coupled with a bounce in Asian stocks following a positive session for US tech yesterday have stabilised the overall risk environment in the cross-asset space this morning, leading the dollar slightly lower this morning with the largest moves concentrated in tech and risk sensitive currencies. While the broad decline in the dollar overnight has seemingly stuck heading into the European session this morning, we are hesitant to chase this theme much further with PMIs tomorrow likely to put the emphasis back on the US exceptionalism story once again, while the market bias heading into Jackson Hole at the end of the week is likely to be dollar positive as Treasury yields drift higher. Furthermore, while Chinese authorities have managed to clot the bleed for now, we think the measures only temporarily resolve the confidence crisis currently underway. As such, we expect more pain for assets specifically linked to China’s growth profile before authorities unveil a more tangible stimulus package heading into Q4 to stabilise investor confidence that this year’s 5% growth target will be achieved.


The quiet summer continued for euro traders yesterday, with the single currency managing to nudge up just 0.2pp against the dollar. But whilst this was a reversal of the trend that dominated last week, it was not fueled by any specific eurozone news, though the larger than expected falls in German PPI numbers were certainly good news. Instead, it came as news out of China finally showed signs of convincing markets of policymakers’ seriousness in supporting growth conditions, a move that sent the dollar into reverse. Notably though, the euro failed to pick up as much support as some other G10 currencies, perhaps unsurprising given the emerging worries around European growth conditions. On this, tomorrow’s PMI data will be key and is unlikely to provide much relief for policymakers hoping to escape a downturn this year. This worry was reinforced again in recent days with the Netherlands falling into recession, Germany teetering on the edge, and the Italian economy contracting unexpectedly in Q2. Until then though, FX markets are likely to remain in wait and see mode, but with the prospect of weak growth numbers likely to offset any boost from positive Chinese news.


The pound has had a strong start to the day as public sector borrowing figures published at 7:00 BST this morning revealed the public finances to be in a better state than expected. Public sector borrowing excluding banking groups totalled £4.3bn in July, less than the £5.0bn anticipated pre-release. Combined with a £0.6bn in reduction in June borrowing estimates, this will come as welcome news to the Treasury given the exceptionally tight spending plans announced by the chancellor in the Spring budget. Despite this improvement however, there remains limited room for fiscal manoeuvre under current spending plans, and this is still the fifth largest July deficit since records began in 1993. Therefore, it is too soon to be popping champagne corks just yet and for the Tory party to put pre-election tax cuts back on the table, especially given a deteriorating outlook for interest payments as Bank Rate continues to rise. For now though, markets are taking the news at face value, with the pound up 0.3pp against the dollar, and a tenth on the euro to start the day. Tomorrow’s PMI data should be more informative for sterling traders however, with signs that UK growth continues to hold up likely to support the pound at current levels.


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