News & Analysis

CAD

Bank of Canada governor Tiff Macklem indicated that the Canadian job market and overall economy will see some painful changes over the coming months, as the central bank steps up its fight against inflation through tighter monetary policy. The hawkish rhetoric helped push CAD to its strongest level since September against USD, with the US currency having also experienced a broader sell off. With Canadian banks closed today in observance of Remembrance Day, no new data on the economic calendar is due.

USD

The US dollar saw a colossal sell-off yesterday, with the DXY index, which measures the greenback against its major peers, losing 1.8% in a 24 hour period. The main trigger for the move was the release of cooler than expected inflation figures, with the Consumer Price Index only rising 7.7% month-on-month, showing a significant slowdown from the previous 8.2% release. As a result, markets increased bets that the Federal Reserve would slow the pace of monetary policy tightening, selling out of USD and buying in to perceived riskier assets. With today being a bank holiday in the US for Veterans Day, further sharp moves remain possible with lower trading volumes marking the potential for outsized moves in currency markets.

EUR

The euro joined in the carnage yesterday, also climbing 2% despite the release of yet another bleak economic update. Monthly Italian industrial production figures fell 1.8%, the second worst reading since March 2020. The European Central Bank also released regular economic bulletin yesterday, where they re-iterated that inflationary pressures remain too high amidst an environment where both global and eurozone growth is expected to suffer. With today being a bank holiday in major economies globally, it will be interesting to see if the euro can hold on to the huge gains it saw yesterday, amidst the current low liquidity market conditions.

GBP

Thin trading conditions led to incredible moves on the FX markets, with the pound following its major peers by climbing 2% against the US dollar. The outlook for GBP itself actually continues to worsen, with figures this morning showing that the UK economy shrank by even more than forecast in September, recording a 0.6% drop. This represents the first quarter-on-quarter contraction in GDP growth for more than a year, and the overall economy is now 0.2% smaller than in at the start of 2020, before the pandemic. The cocktail of weakening confidence, rampant inflation and the prospect of higher interest rates does not, however, see sterling losing out to the euro in the current ugly contest between the two, as GBP is actually up 0.5% against the single currency over the past 24 hours. The overall picture adds weight to the importance of next Thursday’s new economic budget for the UK, where Prime Minister Rishi Sunak and Chancellor Jeremy Hunt will have to carefully navigate market expectations that they will bring public finances under control whilst allaying fears of over-correcting and throttling growth. A tricky task, for sure.

 

 

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