News & Analysis


After a few days of failed attempts to break USDCAD out of its recent ranges, yesterday saw traders take a run at the 1.36 handle, a level that hasn’t been broken since late May. Weak PMI data in Europe had set the tone for USD strength, and a soft retail sales report for Canada added more fuel to the USDCAD rally as it placed another rate hike from the BoC back into question little more than a week after July’s inflation report prompted long CAD calls from some investment banks on the basis of third successive hike in September. Despite the upswing, the number of willing buyers appear to have been exhausted, with the pair quickly retracing back to flat on the day as US stocks rallied. The pullback was further supported by a US PMI report which wasn’t as dire as the recessionary signals in Europe, but still disappointed markets. With growth slowing in the US, traders trimmed their Fed expectations, and a sharp drop in yields across the curve benefited nearly every G10 currency. Canadian developments were fairly peripheral, as the market mostly traded on broader themes. But with retail sales growing by 0.1%, showing widespread weakness that was merely papered over by a surge in vehicle sales, Bank of Canada expectations were also culled. Traders now view the odds of a September hike at 25%, down from 33% earlier this week. For the remainder of the week, loonie traders will mostly be watching the US, as no Canadian events remain on the calendar.


In contrast to Monday and Tuesday, the dollar started yesterday’s session with a fairly strong bid throughout the European session, aided by PMIs out of the eurozone which cast a dark cloud over the region’s economic outlook. However, in similar fashion to previous days this week, the trend in the broad dollar began to turn as US markets came online. A strong open to US cash equities struck the first blow to the dollar, before the US flash PMI for August followed in the footsteps of its European counterparts in undershooting expectations to point towards weaker growth conditions and an annual benchmark revision to payrolls shaved 306,000 off of the headline measure. Although the dollar sold-off throughout yesterday afternoon following the downgrade to the employment data and the weaker-than-expected batch of PMIs, we think the market reaction was primarily driven by the response in US equities as opposed to concerns over US growth. After all, the benchmark revisions to payrolls undershot expectations of a 500,000 downgrade and the PMI data suggested that the economy remained on track to bring inflation back to 2% under the current monetary stance. As this weighed on Treasury yields, forcing them to trade in line with the general sell-off in core yields, the cross-asset risk environment improved considerably, evidenced by the strong session in US equities. This was the dominant factor that weighed on the dollar and continued to do so overnight as Nvidia’s earnings for Q2 and revenue targets once again exceeded expectations, leading NASDAQ futures higher. In early European trading, the dollar has fought back somewhat, although the moves are marginal and keep most currency pairs within recent ranges. Today, there is little on the economic data calendar, with interviews by Fed’s Harker and Collin’s at Jackson Hole the only notable events ahead of tomorrow’s jam-packed schedule.


Yesterday’s eurozone PMIs were front and centre for euro traders, adding to growing fears of a eurozone recession. Across both France and Germany, every single reading started with a 4 handle, except for German manufacturing at 39.1. So too did the aggregate eurozone figures, suggesting the contraction in activity was broad based, leaving the headline composite measure for the bloc at 47.0. Despite the grim set of readings, which had initially sparked a selloff in the euro alongside ECB rate expectations, EURUSD actually managed to finish the session up by 0.2 percentage points as PMI numbers elsewhere also undershot pre-release consensus expectations. Naturally, government bonds rose across the bloc, thus weighing on yields, reflecting the gloomier outlook for the European economy. But importantly for FX markets, this leaves traders pricing just a one in two chance of a final hike from the ECB, and only a 30% chance this takes place in September. That brings markets in line with our long standing call that a slowdown in eurozone growth would likely curtail ECB hiking with a terminal rate at 3.75%, albeit with risks skewed to the upside. But with monetary tightening likely at an end for the bloc in our view, attention will likely shift to the longer term growth outlook and the prospect of rate cuts. Markets may begin to see this play out over coming days, with the most notable event coming being Jackson Hole, where ECB President Lagarde is set to speak.


Cable was a notable mover through yesterday’s session, at one point falling 1.2% off the intraday highs against the dollar. Despite this, the pound still managed to finish down less than a tenth against the greenback and two tenths against the euro. The source of all that excitement came in the form of PMI releases, which in the UK’s case showed an economy slowing more than expected.  Granted, it also showed robust wage growth continues to trouble the UK economy, but crucially with weaker pass through to firm price increases. On almost every other measure, yesterday’s release also indicated rate hikes were weighing on activity as intended, killing off any notion of a jumbo rate hike in September for markets, and reinforcing our call for the next meeting to produce the final rate rise of this hiking cycle. This filtered through to Gilts markets as well, with both 2 year and 10 year yields falling by around 17 basis points. The long end move was particularly notable here, suggesting that investors were not just reassessing the short term prospect for BoE hiking, but also downgrading their longer term for the UK growth outlook. Today though looks to be a lot quieter for sterling traders, with no significant news in the calendar. Instead markets will likely continue to digest yesterday’s data while waiting for Jackson Hole to kick off in earnest.



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