News & Analysis


Continuing the theme of last Friday, the loonie traded sideways against the dollar, as a slow news weekend meant there was little to catalyse moves for the pair as traders returned to the office this morning. Looking forward, retail sales data on Wednesday should give a useful update on the strength of Canadian consumers, especially with speculation mounting that the BoC may not yet be done with policy tightening. But Jackson Hole is likely to be the key risk event for USDCAD, as policymakers and traders alike get the chance to reassess the path forward for interest rates across developed markets.


Once again it is news from China that is holding market attention as markets open to start the week. In an announcement overnight, the PBoC chose to trim the one-year prime loan rate from 3.55%, down to 3.45%. Whilst a reduction had widely been anticipated following last week’s surprise reduction in the MFL rate, the move notably undershot market expectations, with a larger drop to 3.40% having been predicted pre-release. Perhaps even more surprising then was the failure to adjust the five-year rate at all, with policymakers holding rate at 4.20%. For both analysts and traders these latest moves have proven puzzling, perhaps explaining why FX markets are largely choosing to hold fire on any significant moves for now. Looking forward to the rest of the week though, outlook clarity is likely to be the key theme. A new round of PMI data on Wednesday should give an update on the US economic exceptionalism story, one which has allowed the dollar to stay bid in recent weeks. This comes before the Jackson Hole symposium at the back end of the week sees policymakers from the Fed and elsewhere get together and discuss the key policy challenges of the day. Whilst sometimes at risk of being overly academic, this year’s event is likely to be more significant than most for markets. First, it is an opportunity to glean more information on just how close central banks, and the Fed in particular, are to the end of policy tightening. Second, the long run equilibrium interest rate, also known as r*, is likely to be a key topic of debate. More evidence that this rate may have shifted upwards, as indicated by a recent paper as indicated by a recent New York Fed paper, would be of significant consequence for FX markets, but for now we will just have to wait and see.


Conditions look set for a quiet start to the week for euro watchers, at least until Wednesday’s flash PMI reports land. Despite this, one data point of note did land this morning in the form of German PPI readings that came in significantly weaker than expected. Producer prices dropped by 1.1% in July compared to June, and 6.0% YoY, significantly weaker than the 0.2% and 5.1% falls that had been anticipated respectively. This is another positive development on the outlook for eurozone inflation, and should give yet confidence to ECB policymakers that they now have reached the end of this hiking cycle. But markets will have to wait and see if the PPI weakness is accompanied by another slowdown in growth conditions to assess the full meaning of this for the euro, with Wednesday’s data likely key on this front.


Sterling has had a relatively quiet start to the day with the pound largely unmoved, even as new data showed the asking price for UK houses fell by 1.9% this month and 0.1% YoY according to Rightmove. This was down from the 0.2% fall and 0.1% rise respectively seen in July as the market continues to reflect the impact of Bank of England policy tightening. Admittedly, this was largely expected, given the sustained weakness indicated by the more forward looking RICS survey. But it looks likely that more pain is to come for the housing market, as the full impact of rate rises to date continue to filter through to the real economy. That being said, for now it does not look as if a full-scale collapse of the housing market is on the cards, meaning for FX traders this morning’s news simply adds more to the mood music around the UK economy, rather than shifting the narrative in any meaningful way.



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