News & Analysis


The loonie continued to be punished in yesterday’s session as Parliament resumed in Ottawa to the sound of an ambitious fiscal plan from the Trudeau administration. While additional fiscal stimulus previously resulted in the respective currencies strengthening, due to the prospects of a quicker and more robust economic recovery, this wasn’t the case for the loonie in yesterday’s session. The reasoning is twofold. Firstly, Trudeau’s liberal party holds a minority in Parliament, meaning next week’s confidence vote will need the support of one opposition party to avoid an election. With the Conservative Party already outlining that they won’t support the latest governmental stance, Prime Minister Trudeau will look to the New Democratic Party or the third biggest party, Bloc Quebecois. However, the NDP already states that Trudeau’s fiscal plans don’t meet their demands to fill gaps in the social safety net and provide more access to paid leave, while Bloc Quebecois leaders said the fiscal plans didn’t heed calls from provinces for more health-care spending. What Trudeau did offer was a plan to create 1 million Canadian jobs, effectively putting the labour market back on track to reach pre-pandemic levels, along with extensions to the wage subsidy scheme and greater business access to credit availability programmes. In addition, to drive longer term growth, Trudeau has vowed to increase the amount of housing and invest in the environment. However, with none of these pledges making it blatant to markets that Trudeau will find the support of an opposition party ahead of the confidence vote, the level of political risk rose for Canadian assets. Secondly, fiscal concerns are plentiful in Canada. The latest suite of pledges by the government didn’t outline any fiscal anchors for the trajectory of government debt, although Trudeau did state that the government remains committed to fiscal prudence in the medium-term as will be highlighted in the upcoming fall budget. However, the cost of the aforementioned goals and pledges by the Liberal Party won’t be cheap for the government, whose debt pile continues to balloon. With the measures falling short of opposition parties’ requests, markets may also be fearing additional stimulus measures are in the pipeline in order for Trudeau to maintain office. Today, the loonie continues to trade at the mercy of global risk sentiment, but the latest measures are likely to weigh on sentiment around the currency.


The dollar remained buoyant in a broad sense yesterday and overnight, with the Bloomberg dollar index on track for a fourth consecutive day of gains. Yesterday’s data included the flash September readings of Markit’s purchasing managers indices, which were essentially flat in September. Elsewhere, President Donald Trump made further comments suggesting that he may contest the outcome of the US election in the courts -reinforcing concerns of civil unrest or a constitutional crisis in November. A veritable phalanx of Fed speakers lined up yesterday to offer yet more commentary on various topics, including the Fed’s policy strategy, the economic outlook, and above all call for more fiscal support. These included Mester, Clarida, Powell, Evans, Rosengren, Kashkari, Bostic, Quarles, and Daly. Comments by Richard Clarida were noteworthy, with the Fed Vice Chair saying that “Rates will be at the current level, which is basically zero, until actual observed PCE inflation has reached 2%”. Charles Evans professed his dovishness, saying “I don’t fear 2.5% inflation”. Evans’ comments came after some confusion earlier in the week where he said that it was possible rates could rise before inflation had averaged 2% for some period of time. The central bank chorus continues at full volume today, with Kaplan, Powell, Bullard, Barkins,, Williams and Bostic all speaking, many for the second or third time this week.


While the euro’s one-day performance across the G10 board keeps the currency in the green against most of its peers, risk-off flows into the safe haven currencies on the back of lockdown fears globally caused for another plunge in the euro which reached fresh lows against the US dollar this morning. A downbeat German IFO reading arguably also added to the pair’s downward pressure as all three IFO indices printed below expectations. Business climate printed at 93.8 vs the 93.8 consensus, the expectations index moved to 97.7 vs the 98.0 consensus, and the current assessment index printed at 89.2 vs the expected 89.5. While the indices printed below expectations, they were all still an improvement from the prior reading. The German IFO’s economist Klaus Wohlrabe stated that “industry is continuing [its] recovery and its export expectations have improved significantly” and that “German exporters are profiting from industrial recovery in major trading partners”. The rosy picture of a smooth recovery is arguably losing its solidity with several eurozone countries continuously reporting record surges in virus cases over the last weeks. Today’s agenda was supposed to include an EU leaders’ summit, but this has been postponed to October 1-2 as European Council President Charles Michel, who chairs the summit, was in close contact with a security officer who tested positive for Covid-19. That leaves the remainder of the eurozone calendar blank today, turning all focus to the US labour market data in the afternoon.


Sterling saw further, marginal losses to the US dollar yesterday, before mounting a modest rally overnight that also saw the pound regain ground against the euro. Yesterday’s biggest news was that the Treasury will be cancelling this year’s budget, and is expected to instead focus on dealing with the economic consequences of the renewed Covid-19 restrictions recently imposed by the Government. Chancellor Rishi Sunak is expected to speak in Parliament today at 12:45 BST and give an economic statement that will hopefully include policy proposals. The core of the Treasury response will likely be some kind of targeted or partial wage subsidy scheme to replace the blanket furlough programme that ends in October. The Treasury has reportedly been looking at similar programs in Germany, Spain, and France, which subsidise employers for keeping workers on part-time hours instead of cutting jobs outright. In particular, the German Kurzarbeit scheme, described as the “gold standard” of partial work subsidies by the IMF, may provide a proven model for the Treasury to use given how little time is available. German unemployment fell less than peer economies in the 2009 recession and saw a more rapid recovery. A number of businesses, industry groups, and union lenders have issued a joint statement calling on companies to “exhaust all possible alternatives” before making workers redundant this morning, highlighting the high level of attention on the topic both in policy and public circles.



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