News & Analysis

CAD

Volatility returned to the USDCAD currency pair yesterday as Justin Trudeau announced that Deputy Prime Minister, Chrystia Freeland, would also sit as Minister of Finance in light of Bill Morneau’s departure on Monday. The news sent the loonie to retrace part of its gains, but such a move was ultimately unwound with the loonie closing near its daily high. The loonie currently sits at levels not seen since January, marking highs not seen in over six months, as we argue the Canadian dollar plays catch-up with the broad G10 rally. On top of Freeland’s appointment as Finance Minister, Prime Minister Trudeau suspended all parliamentary business until September 23rd where he plans to outline an “ambitious” new spending plan to help drive the recovery. The fact that the additional fiscal stimulus plan was labelled “ambitious” suggests that the current 16% budget deficit, the largest since World War II, isn’t going to be reversed anytime soon. In this current environment, markets are willing to facilitate larger budget deficits, increased issuance and are patient with the speed of the economic recovery, but the narrative coming from Ottawa suggests that expansionary fiscal policy will be in play for at least the next year. However, markets will start to enjoy the greater accountability Trudeau will face on additional stimulus plans as his government’s carte blanche on fiscal policy is set to expire in Parliament. Holding a minority within the legislature means that Trudeau’s spending plans will need the support of at least one of the three opposition parties. Today, Canada’s economic calendar comes back into focus with CPI data for July due out at 13:30 BST/ 08:30 ET. Expectations sit at a reading of 0.6% YoY, marginally lower than June’s reading of 0.7%.

USD

The greenback was once again on the back foot yesterday, incurring losses to most major currencies and reaching significant lows against sterling and the euro. The narrative as to why the dollar is weakening hasn’t changed too much over the last few weeks and continues to be centred around political deadlock and a slower growth outlook. Today, in the wake of US equities touching fresh highs, Asian equities trade mixed with US-Sino tensions leaving doubts in the market. The Trump administration wants university endowments to divest Chinese holdings with the State Department warning colleges it would be “prudent” to get ahead of potentially more onerous measures. It must be noted that the weaker dollar is putting up more of a fight in this morning’s market than it did yesterday, however, with losses against GBP and EUR relatively muted. This evening’s release of the latest FOMC meeting minutes will be the primary focus for investors judging by today’s data calendar. The main area of contention in the minutes will be the assessment of whether the financial framework review will be completed by September’s meeting or November. With yield curve control, negative rates and even forward guidance on QE sitting in the Fed’s toolbox, none are likely to be imposed until the framework review is completed. Commentary on members assessments of these tools will be combed through regardless, along with the assessment of the US economy.

EUR

The euro continued to benefit from broad dollar weakness in yesterday’s session, reaching fresh highs for the sixth consecutive day while remaining unchanged over the week against sterling. Former European Central Bank President Mario Draghi warned yesterday that the pandemic “threatens to undermine the fabric of our society as we know it” and that young people “will be left with a lack of professional qualifications and experience, compromising both their freedom of choice and their earning potential later in life”. His speech sent a message to markets that the debt created in the pandemic should be used to invest in young people, innovation and research. Today’s FOMC minutes will be of interest for the euro, while the 3Q Norges Bank expectations survey is not likely to go unnoticed by EURNOK. The calendar remains light for the eurozone today, with consumer price index and producer price index figures between 10:00 and 11:00BST being the main data releases of note.

GBP

Sterling moved higher against the dollar and the euro yesterday and was among the best-performing major currencies amid a general retreat in the greenback. The GBPUSD exchange rate reached its highest levels of the year so far, although GBPEUR has been less buoyant in general and despite yesterday’s gains remains well away from pre-Covid highs. This week’s round of trade talks with the EU has gotten off to a rocky start, with Brussels reportedly rejecting UK demands for access to the EU for British truckers. Negotiations will resume today. The EU commission has said that allowing the requested level of cabotage rights within EU states would be “fundamentally unbalanced” and too close to pre-Brexit market access given the UK’s lack of commitment to the EU’s desired “level playing field” commitments. October is viewed as the latest an agreement could be struck and ratified this year. This morning’s inflation data showed prices in the UK rising by significantly faster than expected. The headline consumer price index rose 1% year on year, below the Bank of England’s 2% target but much faster than the 0.6% rise last month. The jump in prices may have been due to the Office for National Statistics’ decision to resume the collection of price data for services unavailable during lockdown. The services subindex rose 2.1% in July, up from an already fast 1.8% in June. Restaurant meals made a significant contribution, although this is subject to uncertainty in the future due to the Government’s meal subsidy scheme.

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