News & Analysis


Markets moved fast during yesterday’s New York-London overlap, with a number of data points out of the US and Canada leading the loonie to weaken against the dollar for the second consecutive day, this time by -0.6%. A month of gains have now been erased, with the loonie well within its previous long-standing range and trading at levels last seen around the time of the June BoC decision. By the end of the North American session, the loonie was very close to its lows on the day, with the consolidation signifying that this return to an old equilibrium level could hold until the market receives new information. Fundamentally, three data points tell the whole story. US ADP blew expectations out of the water, and while the report alone is often unreliable, the signal was confirmed in the ISM services employment sub-index. The ISM as a whole was a bit of a “goldilocks” report, pointing to higher output and new orders as well, alongside falling prices. These elements set the stage for dollar strength, while a deterioration in the Canadian trade balance led CAD to not only weaken against USD but also underperform most of the G10. The deterioration was sharp, flipping the balance from surplus to deficit as goods imports rose and goods exports fell, while international services trade was mostly unchanged. Today will be the big day for Bank of Canada pricing, where markets currently expect a 60% chance of a hike next Wednesday. This is because we’ll be receiving jobs data for Canada, the final key data release ahead of the meeting. While last month’s print revealed the first outright decline in employment since last August, StatsCan said it was primarily driven by a slow start to the summer jobs season for students, noting a -77k decline in jobs for youth aged 15 to 24 on a seasonally adjusted basis. We initially took this for granted, but after analysing the data more thoroughly, we realised that StatsCan’s seasonal adjustment model is broken, overweighting strong data from the last few years when the economy was reopening following the pandemic. Without any type of statistical adjustment, the raw data revealed that youth employment actually increased by nearly 200k in May, which is roughly normal when compared to the two decades prior to Covid. Our analysis suggests that today’s report will likely show a solid pace of job growth. While we also expect strong employment gains south of the border, a Fed hike is almost fully priced in for July, whereas there is ample room for the market to adjust BoC pricing. For this reason, conditional on seeing labour market strength in both economies, we think that today’s price action could lead to CAD outperformance even if the broad dollar rallies. This is not a typical scenario, as US jobs data almost always dominates the currency reaction when both the US and Canadian reports are released at the same time.


Whilst yesterday’s session began with a decisively bearish tone for the greenback, it wasn’t to last as a succession of strong US data readings led traders to price in a 50% chance the Fed delivers on its guidance of two further rate hikes this year. This resulted in the US 2-year climbing above 5% for the first time since the US regional banking crisis in March, with the broad dollar tracking the front-end higher too. The most notable data release out of the suite of reports was the ADP measure of private employment. While it has been a poor predictor of the flagship payrolls report, especially since the methodological readjustment last summer, any swings in the data tend to be indicative of whether the payrolls report is soft or not. Recording a net employment increase of 497k, the data considerably beat expectations of a 272k gain to suggest today’s jobs report was going to sit on the stronger expectations. Specifically, 373k jobs were added within services, led by a 232k employment gain in leisure and hospitality. Strength in services employment was then confirmed as the ISM services PMI for June showed strength across the board, but specifically an uptick in firms’ labour demand. All together, both indicators confirmed the concerns by some Fed policymakers who had preferred to hike 25bps in June. That is, demand conditions remain resilient at a time when the labour market is tight, raising the risks of inflation persistence. Ultimately, this mixed sentiment led the greenback on something of a rocky ride over the course of yesterday’s session, although the DXY index did finish marginally down on the day. Looking forwards, all eyes will be on today’s key nonfarm payrolls release, with consensus expectations looking for a print of 230k. A number falling in this ballpark is likely to see expectations for Fed hiking continue to build once again, a move that should be dollar supportive and see the greenback claw back yesterday’s losses.


With little data of note released yesterday in the eurozone, the single currency was left largely at the mercy of what was happening in the other part of the world. Admittedly, whilst German factory orders outperformed consensus early in the morning, eurozone retail sales were disappointing and produced something of a choppy start to the day in FX markets. The main market moving news came out of the US though, with ISM services PMIs and ADP jobs data providing a preview to today’s main event, coming in the form of nonfarm payrolls. The news led EURUSD to continue its rollercoaster ride, with the pair ultimately closing 0.3% higher on the day. Today, we expect the story will not change too much. With the main Eurozone event reduced to President Lagarde’s speech at “The Economic Meetings” in Aix-en-Provence, which will keep traders on their toes for any new pieces of information on the degree of tightening expected by the ECB this year, the general anticipation is expected to remain on the other side of the Atlantic as we await the release of key US employment data at 13:30 BST.


After a brief hiatus, house prices are back in focus once again in the UK. Halifax house price data out this morning showed that the average UK house price fell once again in June. In a relative sense, the marginal 0.1% decline might actually constitute good news, given the stream of negative headlines that continue to appear around the state of the housing market. But the 2.6% annual decline in prices is still the largest year-on-year decrease since June 2011, not exactly a confidence inspiring outturn. Interestingly, this release comes hot on the heels of yesterday’s action in Bank Rate expectations which saw swap markets fully price a peak in Bank Rate of more than 6.5%. This uptick in hiking expectations is likely to place yet more pressure on a beleaguered UK housing market, a dynamic that is increasingly reflected in sterling valuations. Whilst the rise in expectations for policy tightening would ordinarily be positive for the pound, risks to the housing market and economic growth are weighing against the currencies improving carry traits. As such, yesterday’s news saw the pound trade flat against the euro and rise just three tenths against the dollar, as traders wait for better growth data before taking sterling higher once again.



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