News & Analysis


All the stars aligned for the loonie to strengthen yesterday, but despite a supportive backdrop, CAD’s 0.2% gain against USD was relatively modest compared to the near-1% rallies in NZD, AUD, and GBP. Equities rose, Canadian rates fell by fewer basis points than US rates, and crude oil rose nearly $1/bbl, all of which support CAD strength. On the data side, Canadian wholesale sales, factory sales, and existing home sales all beat expectations. Despite those positive factors, the loonie failed to consolidate at the two-month high that it briefly touched immediately following a soft US PPI print. The fact that the currency couldn’t sustain a strong rally in such positive conditions is a bearish signal, reflecting market concerns over Canada’s high levels of consumer and mortgage debt. On today’s calendar we have the final Canadian CPI report prior to the BoC’s December meeting at 08:30 EST / 13:30 GMT. The consensus estimate is for a 0.8% MoM gain, but economist estimates are far more dispersed than usual, suggesting that the risk of a major surprise is high.


Markets continued to rotate out of long dollar positions yesterday following Monday’s consolidation, primarily on expectations that disinflation is well and truly underway in the US. With goods prices leading the disinflationary charge in the core CPI index, yesterday’s negative surprise in October’s producer price index data merely exacerbated expectations that the US economy is over the hill when it comes to peak inflation. In the aftermath of the release, the dollar took another leg lower as front-end Treasury yields sank. The move in bond markets was driven by real yields as traders moderated their expectations of the Fed’s hiking cycle further. However, the extension in the risk-on move proved temporary. While fringe FOMC members hit the wires shortly afterwards, their comments hold less weight than Waller and Brainard’s earlier in the week. Instead, we believe a level of caution was the primary reason for the retracement in the dollar late into yesterday’s afternoon session. A partial retreat in the risk-on mode proved the correct step heading into the overnight session as geopolitical risks amplified on reports that a missile had struck Polish territory and was believed to be of Russian origin. As national security forces assembled and analysed the true nature of the missile, markets quickly turned defensive. This led to losses in Asian equity indices and a renewed bid in the dollar. While it seems as if the missile was in fact shot by Ukrainian forces in an attempt to intervene Russian bombardment, thus trimming the prospect of an escalation in the war, it highlights the tentative environment traders find themselves in as they eagerly assess investment opportunities outside of the greenback. While momentum in the dollar’s depreciation is likely to persist today, yesterday’s retracement following the PPI release and the tentative geopolitical backdrop suggests that further ground higher for risk assets is likely to prove slower going than in previous session.


Similar to the pound, the euro struggled to hold daily highs and retraced to notch limited gains on the day. The retracement shows signs that resistance from valuations are starting to come into play and that despite the aggressive nature of the USD downturn, markets haven’t ushered in a period of secular dollar depreciation. This morning, the single currency is back on the offensive, however it continues to trade some three quarters of a percent below yesterday’s highs. As NATO forces meet this morning, and discussions at high levels likely take place at the G20 summit in Bali on the developments, further euro gains may prove limited. Any change in stance by NATO members to officially recognise the explosion in Poland as an act of aggression by Russian forces would swiftly bring attention back to European energy markets and would result in some correction in European assets, just after rumours of a rapprochement of positions and a possible end to the conflict had spread. A swathe of ECB speakers are also on the agenda for today following the publication of the ECB’s financial stability review at 09:00 GMT. It is highly likely that the hawkish tone is maintained by ECB members in external communications today.


Sterling continues to be one of the main beneficiaries of a weaker dollar and an improvement in the cross-asset risk environment. Following yesterday’s PPI release out of the US, the pound rallied as much as 2.32% on the day to touch highs not seen since mid-August. However, similarly to the rest of the G10 currency board, gains were lost progressively in the afternoon session as a level of caution seeped back into the market psyche following a period of aggressive positioning adjustments. This morning, after a tentative overnight session, the pound is back chasing the move lower in the US dollar. Data out of the UK endorsed the Bank of England’s actions earlier in the month to raise rates by 75bps to 3% in a similar fashion to yesterday’s employment data. Headline CPI in the UK rose a full percentage point to 11.1% in October, driven primarily by higher energy costs following the upwards increase in the Ofgem price cap and higher food prices, but the data also saw a firm core CPI reading which will be of more concern to the BoE. While this resulted in the probability of a 75bps hike in December rising at the margin, the data had little impact on sterling as the focus of FX traders remains on broader market developments. While this is likely to continue for the remainder of today, especially as NATO meets this morning at 09:00 GMT, some focus will also be paid to Governor Andrew Bailey’s testimony at 14:15 GMT.



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