News & Analysis

CAD

The Canadian dollar has been on quite the downswing ever since last Tuesday, when the last US CPI report was released. After yesterday’s incredibly hawkish Federal Reserve meeting, the loonie fell once again as Canadian yields struggle to keep pace with quickly rising US yields and marking the 6th consecutive trading day where a new cycle low was made. On today’s agenda we have Canadian retail sales at 13:30 BST / 08:30 ET.

USD

Yesterday’s highly anticipated Federal Reserve meeting was always going to be a tough hurdle for Chair Powell to clear. A surge in August’s core inflation, released last Tuesday, led money markets to price a one in five chance that the Fed would break its word and hike interest rates by a full percent, and increase its forecasts for the policy rate over the next few years (the famous dot plot). The Fed, anxious not to have markets view it as insufficiently tough on inflation, came out so hawkish that markets weren’t initially sure if they should believe them. The decision was a 75bp hike to 3-3.25%, accompanied by a massive upward revision to the dot plot that now implies 125bps more tightening over the next two meetings to a rate of 4.25-4.5%, with the 2023 dot suggesting a further hike will take place next year as well. The initial reaction to the data was unambiguously hawkish: the dollar rallied, yields spiked, and stocks tanked. Over the course of the press conference, however, markets faded the initial reaction entirely and then some, but by an hour after the decision, prices started to move in the same direction as the initial move. Following the Asian open, traders in the East took the Fed’s hawkishness as credible, extending the dollar rally, pushing DXY through to a new cycle high.

EUR

After holding levels around parity for the past month, the euro finally buckled yesterday under the weight of higher US rates. The single currency fell 1.35% to trade at fresh 20-year lows against the dollar yesterday, with downside momentum continuing this morning despite the Fed’s hawkish tone reverberating throughout eurozone money markets; the ECB’s implied June policy rate sits just shy of 3%, up 57bps from where it was trading following the central bank’s September 8th decision. Within Europe, the euro only outperformed currencies with a higher beta to interest rates and regional risk yesterday (SEK, HUF, PLN). The most notable performer in the region was the Swiss franc, which rallied over a percentage point against the euro yesterday. We expect downside in EURCHF to persist today, with the Swiss National Bank expected to reaffirm its preference for a stronger inflation-adjusted Swiss franc at its meeting at 08:30 BST. While we look for a 75bps hike, bringing the policy rate to 0.5%, the risk remains of a 100bp move, while commentary around the central bank’s appetite to intervene in FX markets will also earn a lot of attention.

GBP

Falling 1.78% over the past three days alone, the pound continues to plumb levels last seen in 1985 against the dollar this morning as markets continue to digest yesterday’s hawkish Federal Reserve meeting. Despite the historical lows, further downside may be exhibited in the pound over the coming 48 hours, especially if Friday’s budget confirms investor fears over the UK’s current account and the ballooning pile of government debt. Prior to that, however, traders’ attention will rest on the Bank of England, who today at 12:00 BST is set to announce its latest policy decision after it was moved back a week due to the period of national mourning. With the data over the past fortnight largely confirming our view of a 50bps hike, there is a risk that the BoE goes bigger following last night’s hawkish Fed meeting. With the impacts of the latest household energy support measures yet to be quantified, however, we don’t expect the BoE to make such a decision this early and instead think that they will point to an acceleration in the hiking cycle at their November and December decisions. For today, a 50bps hike and hawkish forward guidance are unlikely to turn the tide for the pound, although it may cap losses.

FX Elsewhere

Intervention risk is ramping up in Japan as the USDJPY currency pair sharply slides through the BoJ’s perceived line in the sand, despite commentary this morning that officials are readying to embark on “stealth intervention”. Given the yen’s reluctance to weaken in response to the increase in back-end Treasury yields yesterday post-Fed, the level of speculation over the BoJ already intervening is high. The currency pair will now garner a lot of attention, especially if intervention efforts prove fruitless and force the Bank of Japan to alter its policy framework – the ultimate driver of JPY weakness year-to-date.

 

 

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