News & Analysis


The rally in USDCAD continued again yesterday as a broad dollar bid sent USD higher against every G10 currency except the pound. The rally was fairly mild, however, and could be losing steam. Risk-off trading in equities and crude were once again primary drivers, with yield spreads holding quite steady. Both Canadian housing starts and wholesale sales beat expectations, furthering the fundamental case for a reversal, while technical indicators like the 14-day RSI also indicate that USDCAD has crossed into overbought territory. The RSI, at 72, is at its highest level since March. We should caveat that technical analysis should always be taken with a grain of salt, but its popularity among FX traders means it can impact short-term flows. Today, the only Canadian data release will be international securities transactions for June, a low-priority report. With higher impact data out of the US, we expect the dollar leg to continue driving much of the volatility in USDCAD.


Yesterday’s Fed meeting minutes did help to clarify several of the questions we had about the previous decision. The minutes came off fairly hawkish at first glance, noting that “most participants continued to see significant upside risks to inflation” and that further policy tightening could be needed. This message isn’t any different from what we’ve heard already from the Federal Reserve, as they have consistently communicated this risk and downplayed the progress on inflation. But further comments suggest this view isn’t wholeheartedly felt by the entire FOMC, despite the unanimous vote to hike. Two officials begrudgingly conceded, and “could have supported” leaving rates unchanged. With inflation having only cooled further since the July meeting, it’s highly likely that this camp has grown, confirming the market’s view that the Fed’s hawkishness is little more than empty jawboning. Despite this dovish insight, the broad dollar index still succeeded in delivering a fifth day of gains in a row, rising 0.2pp. Coming up, jobless claims are expected to print flat on last month, highlighting the continued strength of the US labour market which should be further dollar supportive.


What had been a quiet week for the eurozone, the data calendar showed some signs of life on Wednesday. The release of Eurozone GDP showed that the bloc expanded by 0.3% in the second quarter, and grew by 0.6% YoY. Whilst not entirely surprising for markets given the lags with which the data is published, it still marked an improvement over the weak numbers posted over the winter period. On top of this, employment growth posted a modest slowdown, but still continued to show jobs being added, consistent with a resilient labour market even in spite of monetary tightening from the ECB to date. For the euro, yesterday’s data provided little to generate much price action, with EURUSD instead moving in line with shifts in the board dollar instead. Coming up, with trade data the only release of note in the calendar, euro moves look set to be muted once again today as we head towards the end of the week. Instead, European traders are likely to have their eyes focused on the Norgesbank, where a rate decision is due to land at 9:00 BST. We expect to see 25bp of further tightening delivered, but risks of a surprise look tilted to the upside with markets having flirted with the idea of another jumbo rate hike prior to the latest CPI release.


In an otherwise busy week, UK watchers should get something of a day off today, before retail sales data lands on Friday morning. Looking back, yesterday’s inflation data contained little by way of a surprise for markets, coming in just a hair north of expectations. Given this, price action in sterling was rather muted, albeit the modest beat was still sufficient to ensure the pound finished the day 0.2pp higher against the greenback, even as the broad dollar posted a rise on the day. For policymakers and markets it was Tuesday’s wage data that really caught the eye, however. The 8.2% rise in wages dragged expectations for Bank Rate higher, with markets currently projecting 3 more hikes from the BoE. In our view this is unlikely to materialise though, with signs of labour market softening set to slow both wage growth and inflation through the second half of the year. But markets are unlikely to be convinced of that this week, with retail sales data out tomorrow the only remaining data point of note, the scene is set for the pound to end the week on the front foot.

FX elsewhere

Overnight, Australian jobs data provided a modest downside surprise. Unemployment rose more than expected, up 0.2pp to print at 3.7%. And the number of people in employment fell by 14.6k, despite a rise of 15k having been expected pre-release. This labour market slowdown likely confirms what markets already suspected, that no rate hikes from the RBA will be forthcoming in the near future given the disinflationary dynamics now at play. This has naturally led AUDUSD lower, with the pair down 0.3% so far this morning in response to the news.



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