News & Analysis


After a volatile trading session, the loonie ended the day slightly weaker against the US dollar on Tuesday. While CAD did fall by a quarter of a percent against USD on the day, it performed well compared to its high-beta G10 peers. A positive impetus to the currency from both a strong inflation print and rising yields was outweighed by broader risk-off trading, which hammered both global equity markets and oil, with the TSX down -1.9% and WTI crude down -1.8% on the day. The inflation report definitely makes September’s Bank of Canada meeting a live one, with the breadth of inflation returning, and core price pressures continuing to defy gravity. Headline inflation rose by half a percentage point to 3.3%, exceeding the much smaller 0.2pp increase anticipated by economists. Given the upside surprise, the market-implied odds of a September hike shot up to 1 in 3. We still lean towards no hike in September, and view the risk of a hike as greater for subsequent meetings, but the Q2 GDP report in two weeks could tip the scales if it confirms the underlying strength in the economy. Between now and the Bank of Canada decision, we do not expect the currency pair to break out of recent ranges, and view a reversal as more likely than a sustained continuation of the recent USDCAD rally. Today, housing starts and wholesale sales are on deck for Canada. The former is out at 08:15 EST/13:15 BST, while the latter is released 15 minutes later.


US retail sales data was the key event of note out of the US session yesterday, printing stronger than expected across the board. The ex-auto measure showed a 1.0% month on month increase in July, well ahead of expectations for 0.4% growth and the 0.2% seen the release prior. Whilst this re-emphasised once again the strength of the US economy, a dynamic that has proven dollar supportive over recent weeks, the DXY index failed to pick up on the news. Weighing against the sales data was an Empire manufacturing release that showed an alarming decline, printing at -19.0 down from 1.1 last month and -1.0 expected. So, whilst the US continues to outperform for now, signs continue to build that a slowdown should be coming as we head deeper into the second half of this year. On this note, industrial production data out later today will be one to watch. Consensus expectations foresee a 0.3% MoM increase, reversing much of last month’s 0.5% fall. Outside the US, developments in China will also be something to keep an eye on having been the dominant focal point for markets this week, with traders waiting to see concrete action to arrest the string of weak data that has been propelling recent dollar moves.


Yesterday proved a relatively quiet one for the euro area, though not unsurprisingly given the public holiday being celebrated across much of the bloc. Naturally, this saw price action in EURUSD limited, with much of the activity concentrated on the other side of the Atlantic. Today, however, GDP numbers should keep euro watchers busy. Data is expected to show the eurozone growing by 0.3% QoQ in Q2, having just escaped winter recession thanks to favourable data revisions. Whilst not enough to challenge the US outperformance narrative that has been key for the pair in recent weeks, an improvement in economic conditions will certainly be a welcome relief for policymakers nonetheless.


This morning’s big piece of news came out of the UK today, with CPI numbers providing a follow up to yesterday’s jobs data release. Whilst headline CPI took a notable step lower on a YoY basis falling 1.1pp to 6.8%, this had been widely expected by markets as last year’s energy price increase continued to fall out of calculations. On the positive side this now means the UK no longer looks such an outlier on international comparisons, with headline price growth in July now not dissimilar to Germany for example, where July inflation printed at 6.5%. The flip side though is that core inflation failed to cool and remains at 6.9%, despite pre-release consensus anticipating a fall of 0.1pp. Such a modest undershoot is unlikely to cause too many worries on its own, but does add to the body of evidence suggesting worrying underlying inflation strength. But in this sense, it was yesterday’s wage data that is more concerning, with average earnings seen growing by 8.2% 3m/YoY. In our view though, the rise in unemployment to 4.2% was more notable, both for overshooting expectations and suggesting that cooling wage and price growth is coming down the line. Given this, we don’t expect the BoE to panic quite yet, especially with another round of data due before the September policy meeting. Instead, we continue to look for a 25bp hike, before cooling data allows the BoE to call an end to tightening with Bank Rate at 5.5%. FX markets also appear to have discounted the morning’s CPI update, with the pound finding only modest support to rise just 0.2pp against the euro and the dollar on this latest data release.

FX Elsewhere

A policy decision from the RBNZ saw policymakers hold interest rates at 5.5% in a move that was widely expected by markets. Given the central banks previously declared pause, anything else would have been a major shock. But the announcement still saw NZDUSD pick up modest support overnight, with markets now seeing a 44% chance following this latest meeting that the RBNZ is forced into tightening policy a little further over coming months.

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