News & Analysis


The Canadian dollar has been taking a beating the last few weeks, but Friday’s session saw the currency fight back, with the trend continuing once again this morning. Friday’s gain of roughly half a percent was triggered by surprisingly strong jobs numbers. Employment rose in Canada by 40,000 in August, doubling expectations and bouncing back from a negative reading the prior month. Along with a surprise increase in wages, traders began to warm up to the possibility of an October hike from the Bank of Canada, with the money market-implied probability rising from 24% to 30%. Immediately upon the release of the data, USDCAD fell by about 60 pips, but traders then faded some of the move as they digested the details of the report. The jobs report seemed strong on the surface, but the fact that employment is lagging population growth and the labour supply means that slack is still building in spite of August’s job gains. Furthermore, unemployed job-seekers are finding it more challenging to find work, spending more time on the bench, while lateral job hops have greatly diminished since the start of the year. We agree with markets on their assessment of the October meeting. A hike is definitely not our base case. But the risk has indeed grown, although it will take confirmation from a string of upcoming data points that suggest economic resilience to spur the Bank of Canada into action.


Whilst the ECB is due to take centre stage this week, the Fed looks set to keep mum, in more ways than one. Reporting over the weekend suggested that not only would the Fed hold rates this month as widely expected, but would also look to reassess the prospect for further hiking this year. On this point, Wednesday’s CPI data is likely to be key. In our view, a print in line with expectations which see core inflation printing at just 0.2% MoM is likely to confirm that the Fed has already hiked for the final time, though the prospects of this being explicitly confirmed appear slim.

It is not however US news that is driving the dollar to start the week. Instead, it is developments in Asia that have sent the DXY index sliding by a third of a percent. Starting over the weekend, CPI data released on Saturday showed that the price growth in the Chinese economy moved into positive territory, just, with a YoY print of 0.1%, a move followed up this morning by another significant fixing error of -1243bps. Not happy to leave it there, the PBoC also took the opportunity to push back against FX speculation and reiterate their commitment to FX stability. In totality, nascent signs of consumer resilience combined with central bank commitment to defend the currency have seen yuan rally six tenths against the dollar to start the week. Spillover effects too were at play, with the morning pickup against the dollar not just limited to the yuan. Notably, AUD is up close to 1% so far to start the week, leading the pack of gainers with a high beta to Chinese growth conditions, as traders buy into the narrative stimulus measures will be successful in boosting the economy.

The notable standout so far this morning, however, has been the Japanese yen. Granted, this too has seen a boost from the signals out of China, but domestic concerns have also helped the yen post gains of more than 1% against the dollar when compared to Friday’s close. In this case it was hawkish statements from BoJ Governor Ueda that added fuel to the fire, saying that “If the BoJ becomes confident prices and wages will keep going up sustainably, ending negative interest rate is amongst the options available”. Traders have naturally interpreted this as a signal that yield curve control could be eased faster than previously anticipated, a move that should if realised add significant support for a yen that has been the single worst performer against the dollar across the G10 FX complex year to date.


The show is back in town, bringing with it the week’s main event, an ECB policy decision. Having been mostly successful in staying on message through the hiking cycle, and largely taking the summer off, ECB speakers have returned with a vengeance over the past fortnight. Not that they have brought much in the way of clarity with them, with members appearing split on how to vote, as are markets and economists on the outcome. Whilst we still think that the balance of risks is tilted towards one final hike from the ECB given some signs of inflationary stickiness, this is unlikely to be euro positive given prospects for the ECB to be hiking the bloc into a recession.


Wages and unemployment data are coming later in the week, and likely to be key for both Bank of England policy makers and the pound. Indeed, falling bank rate expectations over the past fortnight have seen sterling retreat against both the dollar and the euro. In our view, the move lower is likely to prove temporary. Whilst the BoE hikes for a final time at next week’s policy meeting, a high for longer stance that we expect should see some sterling pickup as inflation cools, growth holds up and real rates become increasingly positive. That being said, GBP traders will have to make do with news out of Asia to boost sterling to begin the week, with GBPUSD up three tenths so far this morning.



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