News & Analysis


It was another session where the loonie struggled to consolidate earlier gains as sentiment in the equity market shifted due to pressure from higher US rates. This resulted in USDCAD trading in a wide range of 1.14% on the day. Despite the wide intraday range, USDCAD closed the session out barely changed on the day, marking another session this week where the currency pair has remained within recent ranges. This comes despite Canadian CPI data this week raising the probability of the BoC hiking by 75bps next week, highlighting how the BoC’s hiking cycle is struggling to offset pressures from a stronger dollar despite its effectiveness in doing so for the past nine months this year. This is because the Fed is seen as outpacing the BoC, even if the Bank of Canada finds the reason for one last 75bps hike next week, which is an upside risk to our base case of a 50bp hike.


It was all eyes on US Treasury and equity markets yesterday as they sang the tune for risk appetite in what was a quiet day on the economic data calendar. Pre-market earnings beats from American Airlines, Snap, and AT&T kept US equity futures buoyant heading into the cash open, after which the S&P 500 continued to climb higher despite the slight increase in yields. Commentary by Philadelphia Fed President James Harker, who isn’t a voter on the FOMC until 2023, called the end to the equity bull’s party, however, leading the dollar to rebound late on in yesterday’s session. Harker stated that officials are likely to take rates “well above” 4% this year and “keep raising for a while” until holding them in restrictive territory. Harker’s comments saw the US 2-year rebound, while it sent the nominal 10-year back on its path of continuously breaking fresh cycle highs as it broke through 4.2%, driven by a move in real yields. Towards the end of September, the 10-year struggled to breach 4%, highlighting how much of an effect the latest CPI and Nonfarm payrolls data is having on expectations of the Fed’s elongated tightening cycle, which is proving a high bar to beat and is likely to keep the dollar elevated. Today, we have some more Fed speakers at 14:10 and 14:40 BST in the form of Williams and Evans and given yesterday’s session, the focus will be very much on the back end of the US Treasury curve. As it grinds 3 basis points higher today, the dollar starts the final trading day of the week on the front foot. At 113, the DXY index is returning close to the top of its recent range.


At one point yesterday, the single currency was trading near the top of its range seen over the past week as European energy prices continued to fall and sentiment in risk assets remained buoyant. However, the euro’s limited ability to break above its recent range and back towards parity, as it did at the beginning of October, along with its subsequent decline in the latter part of the session to close out the day relatively flat, reveals two things. Firstly, EUR traders are focusing on the medium-term energy outlook as opposed to any near-term positive energy stories, which is wise given the long winter that lay ahead for the continent. Secondly, the single currency remains highly exposed to US rates despite expectations of a hawkish ECB next week. In terms of near-term energy developments, Spanish, French and Portuguese officials announced an agreement on a new “green energy corridor” at yesterday’s EU summit, which would see an underwater pipeline connecting gas and hydrogen from Barcelona to Marseille. This puts an end to the contentious MidCat pipeline over the Pyrenees. Today, focus will remain on developments in Brussels as the twenty-seven leaders expressed their support for the European Commission’s energy proposals, although the energy price cap remains under debate.


Game, set, and match Lettuce. Capping off a turbulent week, and just a day after she spoke at Prime Minister Questions to say she will “stay and fight”, Liz Truss formally resigned as Prime Minister of the UK. For some viewers of the Daily Star’s live feed, this meant the Lettuce that has been on the side did indeed outlive Liz Truss after an eventful 7 days since she sacked Chancellor Kwarteng and saw almost the entirety of her fiscal manifesto get reversed by Jeremy Hunt. While the news, shortly after midday, prompted a brief relief rally in the pound and UK gilts, this was quickly faded as the market impact of a new Prime Minister will be limited given the absence of fiscal headroom in the near-term and the likelihood of Chancellor Jeremy Hunt maintaining his position as not to disrupt investor confidence further. Nonetheless, political headlines will remain plentiful for UK traders as Tory MPs rush to trim down the list of eligible candidates before Monday. Each candidate requires a minimum of 100 votes by then, before being put to the Conservative party’s membership for a vote on Friday. However, leading of the 1922 Committee, Graham Brady, stated that if only one member can exceed 100 MP votes, they will be appointed on Monday. The odds look good for former Chancellor Rishi Sunak, who received 132 votes from MPs in the last round of the previous leadership race. Penny Mordaunt arguably stands as his biggest threat, while former Prime Minister Johnson offers an outside chance. All of this political noise came just after a speech by BoE Deputy Governor Ben Broadbent, which stated the BoE’s projections of a 5% hit to GDP should the Bank follow the market implied interest rate path north of 5%–arguably this is a conservative estimate as it doesn’t imply a severe housing market downturn. This all comes at a time when consumers are starting to feel the pressure from the cost of living crisis, evident in today’s retail sales data which contracted 1.4% in September. While it is hard to delineate the impact of the inflation surge from the retail shut down due to the Queen’s funeral, but irrespective of this it still highlights the weak UK fundamentals underpinning UK assets. We continue to favour GBP downside over the coming weeks.



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