News & Analysis


The Canadian dollar reversed Thursday’s gains and then some on Friday as it closed the week over a percentage point lower. With hawkish comments from BoC Governor Tiff Macklem at the IMF preventing a widening in the spread between Canadian and US interest rates on Friday, the loonie was primarily impacted by a decline in equity benchmarks. Today, CAD price action may take a more local perspective as the Bank of Canada’s Q3 Business Outlook Survey is released at 15:30 BST. This comes ahead of Wednesday’s CPI data, which Governor Macklem explicitly linked next week’s decision to as he stated that “we have yet to see a clear turning point in underlying inflation”.


The dollar broadly retraced Thursday’s post-CPI sell-off on Friday as equities fell heading into the weekend and money market pricing of the Fed’s terminal rate in March/ May 2023 rose further to just shy of 5%. The latter coincided with the release of the University of Michigan inflation expectations data, which saw the 5-10 year measure tick back up from 2.7% to 2.9%. This coincided with a spike in the 1-year ahead inflation expectation, from 4.7% to 5.1%, and follows on from Thursday’s harrowing CPI report. Today, with focus very much resting on European political developments, the dollar trades mildly softer as equity futures trade slightly higher on lower bond yields. In a relatively light US data calendar, we expect UK developments to set the tone today for risk assets, especially as the level of correlation in core bonds over the past week has been high.


Another jolt higher in the market’s implied terminal rate for the Fed on Friday following the University of Michigan preliminary inflation expectations data for October kept the pressure on the single currency. Despite surging on Thursday following the aggressive equity market rally in the aftermath of September’s US CPI release, the euro closed the week out a quarter of a percentage point lower on the week. This week, focus rests on political developments in Italy after reports of infighting within the new Italian coalition between Prime Minister Giorgia Meloni and Forza Italia leader Silvio Berlusconi, EU energy legislation as member states prepare for a summit in Brussels on Thursday and Friday, and monetary policy ahead of next week’s ECB meeting. Today, ECB Chief Economist Philip Lane joins a roundtable event at 16:00 BST `For a New European Fiscal Framework’, which could set some light on further EU steps on the calibration of the monetary and fiscal response to current economic conditions.


Another U-turn by Prime Minister Truss on Friday, this time reversing the slash in corporation tax from April 2023 and replacing Kwasi Kwarteng with Jeremy Hunt as Chancellor of the Exchequer, did little to settle markets as the pound resumed depreciating and yields climbed higher after the BoE’s last liquidity auction took place. The pressure on Truss heading into the weekend was significant. Not only had her latest measures failed to spark renewed confidence in markets, but high profile backbench Tory MPs were reportedly sharpening their knives as they looked to remove Truss as leader of their party. The circus remained in town over the weekend as political analysts published plenty of stories on the rumoured actions by some MPs in the shadows, while newly appointed Chancellor Hunt met with heads of the UK’s Debt Management Office and Bank of England Governor Andrew Bailey. Stating that the Prime Minister couldn’t afford another battering by markets this week, Hunt is set to rush forward millions of tax and spending measures this morning, with The Times announcing that the statement will come at 11:00 BST before he appears in the House of Commons at 15:30 BST. Given the Bank of England is no longer active in the longer-dated gilt market, the government is exposed to the full wrath of the bond vigilantes this week. Therefore, Hunt’s fiscal consolidation measures today need to be substantial enough to settle concerns over inflation and debt sustainability, otherwise the government risks whipping up further volatility in UK assets ahead of the planned budget at the end of the month. The leaks thus far suggest the 1% cut in the lower income tax band is set to be delayed from April 2023 to April 2024, while the £13bn cut in national insurance is set to stay. This has seen markets trim their expectations of the BoE’s rate cycle, with 25bps already taken out of the whole gilt curve.



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