The Canadian dollar has joined AUD and NZD in outperforming the broad G10 move this morning. While the Antipodean currencies are benefitting from a bid ahead of this week’s RBA and RBNZ meetings (on Tuesday and Wednesday respectively), the loonie has rallied on news that OPEC+ are seeking to cut production by more than 1m barrels per day when it meets on Wednesday to offset the cooling demand outlook. This reaction in the loonie sees it deviating from last week’s trend, where it slumped in parallel with North American equity benchmarks.
After weakening on Wednesday and Thursday last week on reported month-end and quarter-end flows, the broad dollar snapped back as the Fed’s favour measure of inflation, the Personal Consumption Expenditure (PCE) index, saw core inflation surprise to the upside in a similar fashion to the CPI report weeks prior. Unlike the CPI basket, the PCE index gives less of a weighting to housing costs and thus highlighted that underlying inflation conditions remain elevated. This prompted a renewed sell-off in US Treasuries, which sent yields higher across the curve and placed further pressure on the ailing equity market. This week, the dollar could see a reversal back to last week’s multi-decade highs with the packed central bank calendar that will likely reaffirm the Fed’s overall hawkish messaging and a potentially strong jobs report on Friday. In the interim, focus will rest on intervention efforts in Asian markets as the Japanese yen continues to float around the Bank of Japan’s tolerance level and September’s ISM manufacturing data for September, which is released at 15:00 BST today.
In what was a light Asian trading session with Chinese and Korean markets both closed for public holidays, the single currency broadly slumped with European equity futures. However, as liquidity conditions improved with Europe coming online, the euro has reversed earlier losses and now trades slightly higher on the day. With very little in terms of economic events today beyond the release of September’s manufacturing PMIs, most of which are final readings, the single currency is likely to remain sensitive to broader market dynamics. Upside potential in the euro may be capped, however, as news of a potential OPEC+ production cut this week provides unwelcome news to Europe’s energy market at a time when the European Centre for Medium-Range Weather Forecasts (ECMWF) warned over the weekend that high pressure over the mainland in November and December was likely to bring colder temperatures with lower wind levels and rainfall.
After trading three quarters of a percent lower overnight, European traders entered this morning to a stronger pound as headlines from the Tory Party conference suggested that the government was about to make a U-turn on the 45% income tax cut following intense pressure from rebels within the party. While the impact on the government’s fiscal position is largely cosmetic, the top-rate tax cut was seen as the straw that broke the camel’s back in terms of foreign investors financing the government’s growing pile of liabilities. The 1.75% range in the pound this morning highlights how headline risk remains prominent for GBP traders, especially as the party conference continues this week under immense government scrutiny. While many thought Kwarteng would address the speculation in his scheduled speech at 16:00 BST today, he moved earlier to confirm the rumours in an interview with BBC in a means to limit the political fallout. Although this will boost investor sentiment over UK assets in the short-term, as it highlights that there remains a level of checks and balances on the government’s unorthodox economic policies in this volatile macroeconomic climate, the pound struggled to hold onto its brief rally as other UK markets opened. The retracement in GBP coincided with the opening in UK money markets, as traders priced out around 15-20bps of interest rate hikes from the BoE in response to the fiscal news. We remain tactically neutral on GBPUSD in the short-term and require verbal confirmation from MPC members that the Bank of England will underpin investor confidence with a higher rate of returns in November with a move of 100bps or more.