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CAD
Despite a solid set of Canadian growth readings, USDCAD rallied on Friday, somewhat surprisingly. Even so, we continue to think the direction of travel for the pair is higher, assuming our expectations for US data are met this week. Indeed, the only domestic event of note is the release of September PMIs. With these having been firmly stuck below 50 for some time, and this unlikely to change in this latest set of prints, further downside should be in store for the loonie.
USD
US Jobs data should be the focus for FX markets this week, with Fed expectations still in the driving seat for the dollar, and FOMC officials placing increasing weight on the full employment side of the Fed’s dual mandate. While there is a raft of employment data set to be published, the main event comes on Friday, which sees the release of the September jobs report. Markets are looking for 146k payrolls print, with an unchanged unemployment rate of 4.2%. If realised, our bias is to think that this should offer pushback against current market easing expectations that see a 50% chance of a jumbo rate cut in November, with such a move fully priced by year-end. This looks overly aggressive when set against expectations for the labour market that point to stabilisation at worst. If we are right this should put the dollar on the front foot after a soft end to last week.
That being said, a word of caution given events elsewhere. First, Friday evening saw an Israeli airstrike that killed Hezbollah leader Hassan Nasrallah. While this is yet to trigger a dollar haven bid of any note, escalation risks seem arguably more pronounced this morning than at other any point in recent months. Second, stimulus signals out of China are boosting risk-sensitive FX this morning, with Chinese stocks also putting in a notable performance to start the week. While we remain of the view that structural issues need to be resolved in order to see sustained economic outperformance, these latest efforts to support Chinese activity are nevertheless welcome and should at the very least be positive for risk-sensitive currencies in the short term.
EUR
Arguably the major data surprise to end last week came from the eurozone, specifically CPI data from both France and Spain, which in both cases undershot expectations by some distance. Markets had been looking for inflation prints of 1.6% and 1.9% YoY price growth respectively. The data in fact landed at just 1.2% and 1.5%. Nor does this appear to be a result of volatile components either. Core inflation for Spain dropped from 2.7% to 2.4%, having been expected to rise to 2.8% YoY. Moreover, we doubt this pattern is likely to change in the next few days. Given renewed signs of a slowdown in the German economy, an undershoot there looks likely too, an outcome that would all but guarantee a soft aggregate eurozone reading on Tuesday. All told, this steers strongly in favour of two rate cuts from the ECB between now and year-end, and more than likely sees the ECB maintain this pace of easing well into 2025. Against this backdrop, the euro continues to scan as rich, with the single currency looking deeply unattractive when growth in the bloc is non-existent and a collapse in price growth appears increasingly likely to prompt a rapid pace of easing. As such, continue to think EURUSD will retrace lower, with valuations below 1.10 better reflecting fundamentals for the pair.
GBP
This coming week should be a quieter one for sterling considering the major events elsewhere and with only a handful of second and third-tier data prints to contend with. That said, we would note that final Q2 GDP figures out this morning saw a modest downgrade from 0.6% to 0.5% QoQ. Even so, we still think the UK economy is set to outperform in 2024, with even the OECD’s upgraded expectation for 1.1% growth looking a little pessimistic to us. As such, it is unsurprising to see sterling crosses unmoved in early trading, with the fate of both GBPEUR and GBPUSD instead likely to be determined by nonfarm and eurozone inflation later this week.