News & Analysis


With North American markets closed for the Labour Day holiday, yesterday’s session was, unsurprisingly, a snooze fest for the loonie, delivering minimal price action to write home about. Given this, the 0.35pp pickup in USDCAD to begin this morning’s session is notable, with both US and Canadian traders yet to return to the office. This appears to be a spillover from the decision by the RBA to hold rates overnight, alongside weaker than expected Caixin PMIs in China, a move that has seen much of the G10 FX complex move lower against the dollar. In this vein, the Bank of Canada will get its own opportunity to update markets later this week, with a policy announcement due on Wednesday. In our view, and in light of last week’s alarming downturn in GDP numbers, anything other than a hold in policy rates for the foreseeable future would be a major policy mistake. Even so, with markets currently still assigning a small probability to a future hike from the BoC, a confirmation for our view could drag the loonie a little lower this week.


After Friday saw a surge in the dollar such that it closed out the week on a stronger footing, yesterday’s session generally displayed a partial retracement as traders sought to trim some dollar exposure. However, with the Treasury market offline for the day and China’s Caixin services PMI released overnight, the retracement in the greenback was moderate as traders awaited fresh guidance from the two primary drivers in FX markets. This morning’s price action vindicates the level of caution taken yesterday as the dollar DXY index trades 0.2% higher heading into the European session after Treasury yields ticked up in Asia and China’s services PMI printed at its lowest level since January. After a period of silence yesterday due to Labor Day, the US data calendar comes back online today with the release of July’s factory order data and the final durable goods reading. However, it isn’t until tomorrow where we think US developments could really shake up markets as the week’s most impactful releases–August’s ISM services PMI and the Fed’s beige book–are released. In addition to that, commentary from the Fed is set to resume ahead of this weekend’s media blackout.


The Reserve Bank of Australia left the Overnight Cash Rate unchanged at today’s final board meeting held by Governor Lowe. While the move was in line with economist and market expectations, we believed there remained a sizable and underpriced risk that the central bank hiked one further time to a terminal rate of 4.35% given the strength in the economic data was underrepresented by the headline indicators. However, with progress made in the headline measures, it is understandable that the central bank opted to hold in order to further assess the incoming data. In terms of the accompanying rate statement, cosmetic changes were made but generally tilted on the dovish side. Language around the labour market was downgraded, with conditions now seen as “tight” relative to August’s assessment that they were “very tight”, while the central bank also added a sentence on “increased uncertainty around the outlook for the Chinese economy.” It is here where we think the bulk of the sell-off in AUD overnight derives given the rate decision fell in line with expectations and caused minimal impact in Australian rates. While the slowdown in Chinese growth isn’t necessarily a new phenomenon and the data has generally started to improve, the inclusion of this conditionality to further hiking coincided with softer services data out of China this morning and has generally dented sentiment over APAC high beta currencies. Overall, we remain bullish on AUD given our expectation of further stimulus measures out of China and a final hike by the RBA, which remains heavily discounted by Australian rates markets, however, we note that the path higher is now mired with more hurdles and timing of the rally remains highly uncertain.


Price action in the single currency was generally muted yesterday, even as markets received updates from ECB Governing Council members and September’s eurozone Sentix investor confidence index fell below expectations. This wasn’t just because of the overall air of caution in markets ahead of the re-opening in US Treasury markets and the latest signals out of China on services growth, but also because eurozone developments fell in line with expectations. ECB President Christine Lagarde’s speech contained no reference to the upcoming policy decision, while comments by Centeno and Nagel fell in line with their previous leanings within the Governing Council. Furthermore, the decline in the Sentix index will come as no surprise given repeated stagflationary calls and the fact the measure now factors in the weak growth readings out of Germany and Italy in Q2.

Today, the single currency is back under pressure from weak growth data in China and a slight uptick in US Treasury yields, a dynamic we expect to persist in the near-term as per our latest 3-month EURUSD forecast of 1.07. On the eurozone calendar, the main event today will be the ECB’s measure of one-and three-year ahead inflation expectations at 09:00 BST, especially given they will likely be factored into the staff’s updated economic projections next week. Outside of this, Board Member Isabel Schnabel is chairing a legal panel at 13:30 BST and Italy’s PMIs for August are released at 08:45 BST. On the latter, markets will be closely monitoring the data, not only because Italy’s economy posted a surprise slowdown in the second quarter, but also because it piggybacks on soft PMI readings out of Spain earlier this morning.


Early price action this morning has seen the pound give back much of yesterday’s modest gains which saw the pound up three tenths against the dollar and one tenth against the euro. This comes despite limited data out of the UK to propel a move, with only BRC like-for-like sales data of note. This showed a 4.3% increase in August, a significant jump from July’s reading of 1.8%. However, the latter reading appears to be an outlier, with sales volumes negatively likely affected by bad weather. Therefore, it is notable that consumer spending is not slowing markedly on this measure, suggesting a sharp downturn in the UK looks unlikely for now. In isolation this should be modestly sterling positive, but instead, it appears to be a broad dollar bid that is driving GBPUSD. Whilst in part the result of weak PMI data out of China, the sluggish response in GBP to this morning’s data was also likely influenced by an RBA decision to hold rates overnight, a move that adds additional weight to last week’s statements from Bank of England Chief Economist on his preference for a table mountain profile for monetary policy. In our view, this implies one final hike at this month’s MPC meeting, to reach a peak in Bank Rate of 5.5%, before holding policy at this level for an extended period of time. Whether this is reflective of other MPC members’ thinking though, markets will have to wait until tomorrow to find out, when BoE Governor Andrew Bailey appears in front of Parliament, alongside fellow MPC members John Cunliffe and Swati Dhingra.



This information has been prepared by Monex Canada Inc., an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Canada Inc., or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.