News & Analysis


The broad dollar rally has continued to beat on the loonie, leading USDCAD to reach its highest level since late March. The key culprit was US initial jobless claims, which fell from 228k to 216k, when expectations were that they would rise. Indications that the US job market is still running strong may lead the Federal Reserve to hike again this year, and keep its policy rate high for longer. While FX markets took this message from the jobless claims figure, bond markets strangely didn’t, with the US 2-year yield tracking 7bps lower. In Canada, BoC Governor Macklem gave the run-down of Wednesday’s decision. As the decision to hold was so unsurprising, Macklem’s speech didn’t make waves in markets. That being said, the message was slightly different, and more aligned with our expectations going into the meeting. The rate statement sounded a touch too hawkish, in our view, but Macklem struck the right balance with a slightly more dovish tone. Sometimes, differences in tone simply reflect the fact that the rate statement is written by ex-journalists on the advice of staff economists and the Governing Council, whereas the Governor’s speech is the Governor’s speech. Macklem noted that the 2% target is in sight, brought up the risks of over- and under-tightening, acknowledged the significant progress made in reducing excess demand, and suggested that policy may be appropriately calibrated. Even though markets didn’t react, his comments have increased our level of confidence in our view that July’s hike was the last. Of course, the sheer amount of data set to arrive between now and October will determine whether this plays out, but in terms of the central bank’s bias, it sounds like Macklem is ready to call it quits. Today, loonie traders will be watching out for August’s jobs data. Economists anticipate a mild 20k rebound in hiring, and further expect that wage growth eased to 4.7% year-on-year.


The dollar DXY index is on track to record an eighth consecutive weekly gain as it trades 0.5% higher this week, even once accounting for this morning’s slight retracement. US exceptionalism was once again the main driver of the dollar rally, with the bulk of the move higher concentrated on Tuesday when data out of Europe and China resurrected growth concerns, Saudi Arabia’s production cuts added to stagflationary woes, and Treasury yields inched higher on multiple factors. August’s ISM services PMI on Wednesday vindicated the move as it dramatically exceeded expectations, although further upside in the broad dollar then ran into intervention measures against major peer currencies in Asia. While a more subdued session in markets this morning has resulted in some dollar positioning being squared, even as the onshore yuan continues to climb above the 7.3 handle, this doesn’t threaten our 1-month calls as the dollar DXY index trades in line with our 104.80 forecast.

Today, developments in markets are likely to be a touch lighter, with no notable US data released and the remaining Fed commentary before the blackout phase begins likely to be non-committal on the central bank’s next steps. These periods of lighter volatility are likely to weigh on the dollar at the margin, but aren’t necessarily indicative of quieter conditions moving forward or a more sustained decline in the dollar. Looking ahead to next week, key data releases such as US and Chinese CPI, UK and Australian labour market data, and China’s August activity data are likely to spark life back into markets. Before markets open, however, traders will have had time to parse over China’s inflation data for August. Here, any signs of continued consumer weakness are likely to lead to further stimulus being announced, either through the loosening of macroprudential measures or a rate cut on Friday before the swathe of activity data is announced. Given further growth stimulus tends to be dollar bearish, especially against high beta currencies, the risk of such actions being announced over the weekend before markets open partially explains why the dollar’s rally is being trimmed this morning, especially against Antipodean FX. While this should see yuan firm heading into the weekend, we note that the fundamental overvaluation in the yuan is leading USDCNY to buck the general trend of USD weakness.


The euro fell by more than quarter of a percent through yesterday’s session, bringing  the pair to its lowest level since the beginning of June. as downwardly revised GDP and employment readings weighed on sentiment around the bloc. Whilst markets were watching headline figures, ECB policymakers will have been keeping a close eye on labour compensation readings and unit labour costs. Granted the numbers can be sliced and diced to suggest that pay pressures are easing in the bloc. But to us it reads as wages remaining high and sticky, with compensation per employee growing at an unchanged rate of 5.5% YoY. Jawboning by ECB policymakers in recent days has shed little light on the likely outcome of the September meeting, with

economists split down the middle on the likely outcome too. We continue to look for a final 25bp hike, but given the mixed body of evidence leading up to the meeting, the outcome seems finely balanced to us as well. This morning though, a bright spot in the eurozone data has emerged, with French industrial production and manufacturing data surprising to the upside. The news has seen the euro trade higher to begin the day, retracing much of yesterday’s losses to begin the session.


Falling Bank Rate expectations weighed on the pound yesterday, with sterling losing 0.25pp against the dollar, though managing to hold its ground against a euro weighed down by negatively revised GDP and employment data for the eurozone. Whilst the continued fall in market expectations for BoE hiking were initially propelled by Wednesday’s dovish comments from BoE governor Andrew Bailey, the Bank’s Decision Maker Panel survey publication on Thursday morning accelerated the move, showing a greater than expected fall in inflation expectations. This morning has seen the sell-off in hiking expectations continue with the REC report on jobs signalling a slowdown in the labour market that is increasing in speed and severity, however, unlike earlier in the week this isn’t necessarily translating to GBP underperformance. The permanent placement index fell to a new low of -11.1, a level not seen since June 2020, and the temporary billings index also dipped below zero for the first time since the onset of the Covid 19 pandemic. Not to mention, candidate availability rose, vacancies fell, and whilst pay pressures remain the one area of strength, it now appears only a matter of time before slowing labour market conditions translate into weaker wage growth. Granted, the report has been overly bearish in its signal for the UK labour market to slow through the course of this tightening cycle. But with unemployment rising faster than expected and due to soon exceed BoE estimates of neutral, this provides additional evidence for MPC members that would look to end the BoE’s hiking cycle at the upcoming September policy meeting. The cumulative effect of these dovish signals has been that markets now no longer fully price a hike from the BoE in two weeks’ time, and see just a one in two chance that they ultimately deliver just one more hike this cycle. Whilst we maintain our call for a final hike at the September meeting, if the accumulation of soft data points is joined by weaker-than-expected labour market and inflation data before the 21st of September, the risks increasingly skew towards the BoE failing to deliver even that.



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