News & Analysis


The Canadian dollar was under pressure for most of yesterday’s session as the fall in oil amid a risk-off market resulted in commodity currencies selling off across the board. However, despite the dip in oil and North American equity markets, the loonie faced its own challenge as the Bank of Canada released the details of its inflation framework review. While the 2% target with a 1-3% tolerance band was renewed instead of a switch to a dual mandate or an average inflation target like the Fed, the announcement wasn’t quite status quo. The Bank stressed that they would utilise the target range for inflation such that the Bank could reach its implicit goal of maximum employment over time. With the estimate of maximum employment subject to greater uncertainty due to the impacts of the pandemic, markets took this as a notably dovish development for the BoC despite the labour market sitting on a strong trajectory at present. This led to a minor sell-off in front-end bond yields and sustained pressure on the Canadian dollar heading into the evening session. Today, the Canadian government unveils a budget update, however, most of the market attention will sit with tomorrow’s CPI data at 13:30 GMT and Governor Macklem’s speech at 17:00 GMT.


The dollar firmed at the margin yesterday in what was a limited data session as Omicron concerns remained top of mind for investors. The risk-off mood wasn’t just visible in the FX space as North American and European equities fell along with back-end bond yields. Today, any adjustment in risk sentiment is likely to be the main driver in the FX space, while positioning in bond markets ahead of this week’s central bank action may also become visible and move the needle for the broad dollar. On the data front, markets can expect the release of November’s NFIB small business optimism data at 11:00 GMT and November’s PPI Inflation data at 13:30 GMT. While neither are expected to cause too much FX volatility, the data will provide a richer information set in which to predict the Fed’s tone on inflation and economic activity tomorrow night when they announce their latest policy decision.


The single currency fell slightly against the dollar in yesterday’s trading session as markets continued to trade in a risk-averse manner. In what was a limited data session, the euro’s declines weren’t sizeable as the most liquid currency pair remained in recent ranges ahead of this week’s Fed and ECB meetings. Data out of the eurozone this morning should show industrial production rising 1.2% in October, up from -0.2% in September, despite mixed country readings over the past week. A substantial rise in German production points to solid overall gains in the region. The data is unlikely to be too instrumental for FX markets, however, meaning the focus remains on overall risk sentiment.


The pound remains under pressure against the dollar this morning despite positive labour market data alleviating concerns over a disruptive end to the furlough scheme in October. This is largely due to the arrival of the Omicron variant and the extent to which this has hamstrung the Bank of England at Thursday’s meeting. Consensus has quickly shifted from a 15bps hike to no change at December’s meeting despite the fact that October’s unemployment rate fell from 4.3% to 4.2% and undershot the BoE’s expectation of it peaking post-furlough at 4.5%. The positive labour market data supports the prospect of a 15bps hike from the central bank in February should the growth risk of the variant abate by then, however. With the data released already for the UK today, focus will remain on broader market risk sentiment and how bond markets price leading into this week’s string of central bank meetings for the rest of the session. On the political front, the extent of the Tory rebellion against the government’s latest measures will be revealed today as they are put to a vote in Parliament. Pressure remains on the Prime Minister not only for the tightening of measures, but also the Christmas party scandal. Both come at a time when cases are rising exponentially, with around 200,000 cases of new infections a day being registered according to an estimate by the UK Health Security Agency.



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