News & Analysis


The loonie posted a 1.14% gain in yesterday’s session as it rallied from Friday’s multi-year low on a reduction in Treasury yields, and thus a narrowing in front-end rate spreads, along with a bid in equities and oil. While the loonie’s feel-good factor has extended into today’s session, as equity futures continue to rally and the momentum in oil remains higher towards $95 per barrel, we remain cautious of the longevity of this risk-positive environment, especially ahead of Friday’s labour market data.


While UK fiscal events stole the headlines in the morning of yesterday’s session, the day as a whole will be remembered for the big bid in US Treasuries following weaker ISM manufacturing data for September and the impact the moderation in US rates had on risk assets. Released at 15:00 BST, the ISM PMI data, which is regarded more highly in the US than the S&P measure that is prominent in Europe, showed activity in the manufacturing sector was much weaker than expected. With a reading of 50.9, the data undershot expectations by 1.1 points and suggested that the US manufacturing sector was only just expanding. The sub-indices painted an even worse picture. New orders dropped from 51.3 to 47.1, the lowest reading since May 2020, while the forward-looking index of manufacturing demand looked even worse once you removed inventory demand. For the Fed’s dual mandate, both the employment and prices paid indices fell markedly too. Employment fell 5.5 points to 48.7, while prices paid fell 0.8 points to 51.7– a huge cooldown from 78.5 in June. While anecdotal evidence suggests that contracting employment is due to a tight labour market, the ISM report signalled that the US economy was slowing down and inflation pressures were beginning to cool within the core goods sectors. This prompted markets to not only price a lower terminal rate of 4.35% in May 2023, but also a higher probability of cuts in H2 2023. These dynamics in swap markets filtered through to bonds, with the 2-year Treasury yield falling 20bps at one point in yesterday’s session. The reduction in US rates buoyed global equity indices and sent currencies with a high sensitivity to risk conditions over a percentage point higher against the dollar as the DXY index fell 0.38%. We are hesitant to read too much into the ISM data, however, as markets have been wrongfooted before by weakening soft data measures before they are superseded by strong hard data releases. We see Friday’s payrolls report as more instrumental for the dollar’s near-term trajectory but will be paying close attention to the deluge of Fed commentary this week, especially amidst increased volatility in core bond markets.


Despite the improvement in cross-asset risk conditions yesterday following weaker US ISM data (see below), the euro notched only minor gains against a depreciating dollar. In an environment where FX volatility is elevated, the euro’s relative stability at low levels yesterday was telling. Although it can be partly explained by a substantial moderation in German Bund yields, meaning the EURUSD front-end rate differential remained largely unchanged at 2.5%, we believe positioning was also at play. With a threatening economic backdrop, rising energy prices, and harrowing calls by meteorologists over a cold winter, sentiment remains bearish over the single currency and there remains a reluctance by traders to pick it up heading into the winter months. Although the single currency seems to be playing catch up this morning as Treasury yields continue to tumble and equity futures trade in the green, we believe any upside will prove transitory heading into the winter months. Today, the domestic focus will be on President Lagarde’s comments at 16:00 BST.


Volatility remained in abundance in the GBPUSD pair yesterday as the pound was initially whipsawed around by rumours of a reversal in the 45% tax rate cut, which were later confirmed by Chancellor Kwarteng, and then received a boost from the deteriorating US manufacturing data and more robust risk-on environment. With US Treasury yields continuing to tumble this morning, led by the 2-year which is down over 8bps to trade just above 4%, and reports in the Financial Times that Chancellor Kwarteng will bring forward his medium-term budget to this month after previously citing November 23rd as the release date, the pound is trading close to half a percent higher against the dollar.  Similar to price action in the euro, we think the rally in sterling is largely a product of cheap valuations and an improvement in global risk conditions due to lower US rates, which can turn at the flick of a switch as this year has shown.

FX Elsewhere

After a strong performance in yesterday’s session, on the back of news that China will further support its ailing housing sector and hawkish positioning ahead of this morning’s RBA meeting, the Aussie dropped overnight to reverse three-quarters of yesterday’s rally as the RBA undershot expectations by hiking rates just 25 basis points. Accompanying the more moderate rate hike was dovish commentary by Governor Lowe, who implicitly stated that due to the high prevalence of variable rate mortgages in Australia and the level of indebtedness in the housing market the Cash Rate Target was adjusted at a slower rate than it has been thus far this year. The decline in the Aussie didn’t bind, however, as it joined other high-beta currencies in rallying on the back of falling US rates. Although the slowing RBA hiking cycle hasn’t had a lasting effect on the Aussie today despite the largest decline in the 3-year Australian government bond yield since 2008,

We believe the flatter policy path leaves the Aussie dollar exposed in the event of a rebound in the dollar.



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