News & Analysis


The Canadian dollar slipped seven tenths of a percent against the greenback yesterday as US equities came under pressure alongside risk assets as a whole. The loonie’s decline was notable as it coincided with an uptick in Canadian government bond yields and expectations of a further rate hike from the BoC, with markets now assigning a 65% probability that the BoC raises rates once more over the next two meetings. With global risk remaining under pressure this morning, the Canadian dollar continues to trade on the back foot at the start of the European session, with very little scheduled for release ahead of Friday’s July jobs report.


After a strong July for risk assets, traders started August by de-risking their portfolios. This saw global equities trade lower ahead of key calendar events later in the week, while the dollar strengthened against nearly the entire expanded majors, with just ILS notching gains against the greenback on the day. While there were little headline triggers for such moves beyond the RBA’s decision overnight, which was important domestically but can’t explain the moves globally, the de-risking in markets was partially vindicated by news late in the afternoon session that Fitch had stripped the US of its top-tier sovereign credit rating after “repeated debt limit standoffs” and former President Donald Trump was indicted for an “unprecedented” attempt to overturn the election outcome. Ultimately, while the news would go down in the history books, it has very little bearing on how markets will trade in the near-term. Instead, we think yesterday’s cross-asset price action was reflective of traders reducing their conviction over the “soft landing” narrative ahead of key earnings reports from US blue chip stocks, an interest rate decision from the BoE, and Friday’s jobs report. In terms of the data released yesterday, the ISM manufacturing PMI confirmed that the sector remains in contraction, with the prices paid index confirming that core goods disinflation is likely to persist. Meanwhile, the JOLTS report saw labour demand continue to moderate, with job openings falling by more than expected and the reported hiring rate falling to a cycle low of 3.8%. While welcome developments, neither releases altered the prevailing view on the US economy. Today, the dollar continues to trade on a stronger footing alongside other haven assets following yesterday’s news from Fitch, however the risk-off move is far more limited than that seen prior to the announcement as ultimately the downgrade from AAA to AA+ doesn’t threaten the markets view that US Treasuries are still the global risk free asset. In terms of data released today, weekly mortgage approvals are released at 12:00 BST before the ADP measure of private employment for July at 13:15 BST. Neither are likely to move markets, however. Especially the ADP measure after its horrendous forecast error back in July.


Price action in the single currency was fairly muted yesterday, with the euro tracking the rest of the G10 currency board lower against the dollar, albeit to a much more limited extent given the US credit rating arguably helped the euro due its status as an alternative reserve currency. What hasn’t helped the euro, however, is the unusual level of radio silence from the ECB. Granted it is summer on the continent, but the lack of post-meeting communications is somewhat unnerving for traders who still believe the ECB will hike once more in September, even after labour market data yesterday and this morning supports their argument for tighter policy. With the eurozone data calendar thinning out now for the remainder of the week, all eyes are on the dollar leg. Signs in the upcoming data that the soft landing narrative won’t be as clean cut as markets were initially led to believe will likely lead EURUSD lower heading into the weekend.


Yesterday’s session brought about news of further pain in the UK housing market and cooling retail inflation. In combination with a broad risk-off mood across markets, this led traders to price lower odds of a 50bp hike from the BoE tomorrow, which undoubtedly played a partial role in sterling’s larger losses against the dollar and decline against the euro. Today, positioning ahead of tomorrow’s BoE decision will be the dominant factor for GBP crosses given there is little set to be released.

FX Elsewhere

While the G10 economic calendar thins out, today sees a major event take place in the LatAm space. The Central Bank of Brazil (BCB) is set to begin their easing cycle, dropping the Selic rate from its current peak of 13.75%. Markets expect a 50bp cut to start the easing cycle, significantly below the 100bp drop delivered by the central bank of Chile earlier in the week, however we stand on the more dovish side of expectations, looking for just a 25bp cut alongside the economist consensus. While a more moderate rate of easing is likely to support renewed BRL strength as markets price out expectations of a more aggressive easing cycle, we note that the risk profile of today’s meeting is heavily asymmetric. A 50bp cut or more runs the risk of a substantial BRL sell-off, not only because of the level of intent it will signal to markets, leading to a further reduction in the currency’s level of nominal and real carry, but it will also raise questions about how much influence the government has over monetary policy after it has repeatedly called for lower rates throughout the year. With investor sentiment still fragile after repeated public feuds between the central bank and the government, a larger rate cut is unlikely to be looked upon kindly by international investors.



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