News & Analysis


Yesterday, the loonie traded in a jaw-dropping 270-pip range following the US CPI beat and subsequent equity-led reversal in risk sentiment. Excluding the market turmoil at the height of the Covid crisis in March 2020, the most recent trading day with an intraday range that wide was almost seven years ago. This was in a session that didn’t even contain any CAD-specific news. Correlated markets are just smacking the loonie around like a ping pong ball. That said, calmer waters are on the horizon, with only medium impact data set for release today. Specifically for Canada, we’ll see factory sales and wholesale trade at 13:30 BST / 08:30 ET. Later on, Bank of Canada governor Tiff Macklem will speak to journalists at the IMF & World Bank annual meeting, with remarks published at 21:00 BST / 16:00 ET.


As expected, yesterday’s CPI report wreaked havoc in global markets. With the core reading printed at 0.6% MoM, exceeding expectations by 0.2 percentage points, equity futures dropped, Treasury yields spiked, and markets re-engaged with further USD longs. While this was a textbook reaction to an inflation print that was going to make the Fed hike into even more restrictive territory, what was then to come left many scratching their heads. As the back-end of the Treasury curve started to moderate, with a decline in real yields taking the nominal 10-year yield from highs of 4.05% back towards the 4% handle, equities started to bounce and the dollar rally reversed. The move was aggressive, especially as near-term expectations of the Federal Reserve remained extremely hawkish with 2-year yields trading close to fresh 15-year highs recorded earlier in the day and terminal pricing of the Fed was stable above 4.8%, suggesting light positioning in equities was likely behind the move. The improved cross-asset risk tone driven by rallying equities meant the dollar fell 0.75% on the day as the DXY index bounced from testing the 114 handle. Today, the focus for traders will rest on the cross-asset environment yet again, with September’s retail sales data due out at 13:30 BST and inflation expectations data at 15:00 BST. As things stand, the dollar opens on the back foot as equity futures continue to trade higher.


The single currency was etching higher over the early parts of yesterday’s session as markets reversed earlier positioning and arguably sought to front-run a US CPI print that met or undershot expectations. However, that wasn’t the case as the core number printed much stronger than expectations at 0.6% MoM, with the uptick so strong that it resulted in the headline inflation reading exceeding expectations at 8.2% YoY. In the aftermath of the inflation data, the single currency dropped over a percent as US yields soared higher on expectations of two more 75bps hikes from the Fed this year. However, the turnaround in real yields and equities shortly after, arguably due to technical factors, saw EURUSD catapult higher to close the day three-quarters of a percent higher. Today, with substantial volatility expected in UK markets should the government announce any form of fiscal retreat, the single currency will likely be dictated by price action in GBPEUR as the cross trades close to its 6-week high.


Today could well be crunch time for UK asset markets. Not only is the Bank of England set to have its last scheduled day providing liquidity in longer-dated gilt markets despite calls from the Pensions and Lifetime Savings Association to extend the programme until the end of October, but Chancellor Kwarteng is set to arrive home from Washington early as speculation brews over what one former cabinet minister called “the mother of all U-turns”. The biggest event for markets will undoubtedly come from the fiscal news, with the pound rallying over 2% against the dollar yesterday largely due to speculation that there will be some sort of fiscal retreat following pressure from all corners of financial markets, the Bank of England, and Conservative party backbenchers. The extent of the fiscal recalibration will be key to repricing the fundamentals for most UK assets along with the implied path for the Bank of England’s Bank Rate. Rumours are currently circling on a reversal in a cumulative £24bn in tax cuts, with £18bn of that recouped by reversing planned corporation tax cuts alone. However, this shouldn’t distract from the potential problems that could ensue in the gilt market as the Bank of England conducts its last auction. In anticipation of today’s withdrawal, the Bank has been rejecting far fewer offers as it tries to allow as much deleveraging from pension funds as possible. Over the past three trading days, the BoE has bought £7.56bn longer-dated gilts, rejecting just £344.8m. This compares with £5.45bn bought and £7.405bn rejected in the 9 trading days prior. In addition to this, the Bank has also been buying a huge amount of inflation-linked bonds after it expanded the parameters of its auction on Tuesday. Yesterday, the Bank bought a whopping £3.12bn in inflation-linked bonds, its biggest operation yet. With markets speculating over the readiness of the gilt market for the Bank to withdraw its liquidity backstop, especially at a time when they could be thrown around by fiscal developments, today is set to be a turbulent day in UK markets.



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