News & Analysis


The Canadian dollar sat alone in the green against a broadly stronger dollar yesterday, with the move largely explained by the continued rally in WTI prices. The price of North American crude climbed by 1.8% in yesterday’s session to trade just shy of $90 per barrel, even as the head of the IEA, Fatih Birol, warned that peak fossil demand will happen this decade in the Financial Times. The notch higher in crude led the TSX to outperform US benchmarks, largely due to the corresponding 1.7% rally in energy stocks, however, as we noted yesterday the going may get tougher from here on in for the loonie. In order for CAD to continue climbing, we think traders will need to see another benign US inflation release which takes the Fed out of the question. However, we think this is unlikely, and under our expectation for a marginal beat in the monthly core CPI figure, we expect to see USDCAD climb back up to the midpoint of its recent range, a move that has already started in early morning trading.


After a fairly uneventful session yesterday outside of a flurry of EURUSD price action late in the evening, most in the market are expecting G10 FX volatility to ramp up. This is highlighted in the levels in which overnight implied volatility trades at for the major currency pairs. For both GBPUSD and USDJPY, overnight implied vols sit at their highest since early August, just before July’s US payrolls data were released, while for EURUSD, overnight implied vol trades at its highest since early May. The driver of this spike is today’s US CPI release, where we see the risks as largely skewed towards an upside surprise in core inflation. Granted, there is a risk that the monthly core figure prints in line with expectations at 0.2% MoM, however, we think markets will treat this as fleeting given robust growth conditions and the risk that the recent uptick in energy prices will eventually show up in core goods inflation. However, an upwards surprise in the core figure, as is our expectation based on higher airline fares and the possibility that used car deflation slows, will re-centre the market focus on the Fed’s near-term policy path, with the probability of a Q4 rate hike likely to rise from 0.48% at present. All told, today’s inflation data poses little risk to the dominant dollar narrative, in fact, it could extend it further if it reintroduces Fed hiking to the mix.


As we noted in yesterday’s Morning Report, it had been eerily quiet in Frankfurt given how finely balanced Thursday’s ECB decision was. Well, yesterday evening saw that silence get broken as Reuters published the first “sources” story of the week. The article stated that the ECB’s staff projections for 2024 will see inflation sit above 3%, up from June’s projections and above economist estimates. While “sources” stopped short of presenting a likely policy outcome, markets interpreted the news as significantly hawkish, especially as it likely coincides with a material downgrade to near-term growth projections. The euro posted a late-night rally on the news, while swap markets have swung from pricing Thursday’s decision as a coin flip between a hold and a 25bp hike to now implying a 70% probability of a hike. In our view, given growth conditions are likely to deteriorate further in the near-term, the ECB’s window to deliver a final hike of the cycle to insure against any inflation persistence is incredibly narrow and will likely tip the balance in favour of a hike at tomorrow’s meeting. If confirmed, the rumoured inflation projection for 2024 would support this view as the updated forecasts would be markedly more stagflationary in the near-term.

Ahead of tomorrow’s ECB meeting, however, the euro faces an asymmetric risk profile with unofficial pushback from ECB doves and an upward surprise in US CPI potential catalysts for renewed downside pressure on the currency. While any further sources stories are hard to predict, we do note that there is a credible risk that August’s inflation data overshoots expectations (see USD), while an in-line reading may well be swept under the rug by markets. If this materialises, we could see EURUSD trace back to our one-month forecast of 1.07, the low of its current range.


The pound has begun the day in retreat, as newly released GDP numbers fell by half a percent in July, reversing June’s gains and below economist expectations for a 0.2% contraction. Admittedly, we are conscious of reading too much into this morning’s reading. The uptick in industrial action during the month had a mechanical downward impact on the GDP reading, with notable strike action from both doctors and teachers. In the latter case, a pay deal with the government means that this is unlikely to be repeated going forwards, though an ongoing stand-off between doctors and the government could continue to weigh on NHS activity. Beyond this, it is also reasonable to think that a spate of poor weather weighed on the economy, reversing some of June’s strength. This again is unlikely to be seen in the next round of data with better weather being seen in August. That being said, the unexpected slowdown in July GDP does correlate with PMI data that has also slowed more quickly than anticipated, raising the prospect of a more sustained slowdown in the UK economy, an outcome that would weigh on the pound, but a risk that we see as too early to judge as yet.



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