News & Analysis


The Canadian dollar continued to rally in yesterday’s session as broad USD weakness reverberated across G10 markets, however, the loonie struggled to climb up to Wednesday’s highs as weaker US growth also impacts Canada’s economic outlook. Front-end yield spreads failed to widen between CGBs and USTs for this reason, leaving the loonie at the bottom of the pack when measuring G10 performance vs the US dollar. Today, loonie traders will be keeping a close eye on August’s GDP data at 13:30 BST following the slip in US growth in Q3 and the Bank of Canada’s downgrade to 2021 GDP on Wednesday. The data is expected to show the economy expanded by 0.7% MoM in August, following a tentative start to the third quarter when July’s data printed at -0.1%. Any positive surprise in the data is likely to embolden claims of even earlier rate hikes from the Bank of Canada, with traders now eyeing February’s meeting as an option. Not only will August’s data be in scope, but also Statistics Canada’s preliminary reading of September’s conditions.


It was all about bond markets yesterday for the FX space as the dollar took on water against all G10 currencies after the advanced reading of Q3 GDP undershot expectations. Printing at an annualised rate of just 2%, the data release not only undershot expectations by 0.6 percentage points but also marked the slowest pace of economic expansion in the recovery phase thus far. Growth was dragged down by consumption growth, which slowed from 12% in Q2 to just 1.6% in Q3 as stimulus payments dropped off and Covid concerns reemerged. While there are plenty of reasons to suggest that growth will pick up again in Q4, bond markets reacted unfavourably to the GDP release. US 2-year yields fell 5bps following the GDP release, and although the moderation was slight, spreads widened by a great degree as front-end yields rose in other G10 bonds. The DXY index ultimately closed the session 0.57% lower, with the single currency leading the charge with NOK and CHF. Today, PCE data for September is released at 13:30 BST, but markets are unlikely to deviate too much with the release as the inflation signal was already cast earlier in the month with the CPI reading. Positioning ahead of next week’s Fed meeting and month-end flows are likely to dominate how the dollar trades today.


It was all about the euro in FX markets yesterday as President Lagarde failed to push back expectations of rate hikes in 2022, something her predecessor would have seemingly done. When asked about the 20bp rate hike baked into swaps that expire at the end of next year and whether it was reflective of the ECB’s policy stance, Lagarde stated that it wasn’t in line with the ECB’s view but that it was also not for her to say whether this should be adjusted or not. The lack of pushback by the ECB president gave markets the green light to lift front-end eurozone yields at a time when their US counterparts were falling after a slip in Q3 GDP. The single currency rallied over half a percentage point against the dollar as a result of the narrowing yield spreads and broke through its recent range. However, this morning, with the dollar making a slight comeback, EURUSD has returned to trade back inside of its pre-ECB trading ranges. Today is a busy day on the calendar for the eurozone, with several GDP and CPI releases scheduled throughout the day along with the ECB survey of professional forecasters at 09:00 BST. French CPI and GDP figures both overshot expectations, with GDP printing at 3.0% QoQ vs the expected 2.2%, while inflation came in at 0.4% MoM vs 0.3% expected. The French prints add to the markets’ more aggressive policy pricing compared to the ECB, and may paint a picture for the remaining GDP and CPI prints of the day.


Broad USD selling supported the pound in yesterday’s trading session, while it also received tailwinds from a rallying euro via the EURGBP cross. The pound did very little yesterday on its own merit, however, and that looks to be the case for today’s session too. With very little pencilled in on the data front, GBP traders will likely await the opening of Gilt markets before taking any substantial positions, especially given how instrumental price action in front-end rates was in yesterday’s session. Prior to the UK bond market opening though, the pound is likely to continue trading in the tight range recorded in the overnight session, with the dollar broadly retracing at the margin.

FX Elsewhere

Money markets have been on a rampage lately, pricing in expectations of aggressive policy normalisation across the G10 space. One of the more questionable moves was in Australian Bank bill futures, which have rates rising to 1.6% at the end of 2022 after pricing an increase to just 0.8% on Monday. The hawkish repricing of Australian rates was to be confirmed overnight, however, as the yield on Australia’s April 2024 bond – noted as the final bond subject to the RBA’s 0.1% yield curve control programme – jumped to nearly 0.8%. The Reserve Bank of Australia chose not to step in and defend its yield target in markets today, which is a notable development for markets just four days before the next RBA policy meeting. The lack of RBA intervention also comes after core CPI data printed at 2.1% on Wednesday, the first time the core reading has entered into the central bank’s 2-3% target range since 2015. While markets can broadly expect a change in policy from the RBA next week given the latest developments, the impact on AUD has been limited as the currency sits at levels last seen in July before the latest lockdown measures were announced.



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