The Canadian dollar surged 0.88% higher on Friday as US equities soared and yield spreads with the US narrowed. However, the resurgence in the loonie is likely to be limited in our view, as we favour renewed Canadian dollar weakness this week owing to our below-consensus view on the Bank of Canada on Wednesday, where we expect a downshift with a 50bp hike. This largely runs against the views of all major Canadian banks, who upped their expectations to 75bps last week following the release of September’s stickier inflation report.
The 2-year Treasury yield fell 14bps from fresh cycle highs on Friday as the Wall Street Journal’s Fed whisperer, Nick Timiraos, published an article stating the obvious; that Fed officials are considering slowing the pace of their hiking cycle at their December meeting. The surprising dovish reaction in US rates weighed on the broad dollar and boosted broad risk sentiment, with all three major US equity indices posting gains of 2.3% on the day. The 0.82% decline in the dollar on Friday saw the greenback close the week out 1.07% lower, as per the DXY index, with the US rates sensitive NZD leading gains within the G10. This morning, the dollar trades broadly higher, with the DXY index posting gains of 0.12% after what was a troubled overnight session for Chinese equities. The 5.9% drop in the Hang Seng index this morning comes in spite of China’s Q3 GDP data exceeding expectations with a 3.9% QoQ print. The negative reaction in equities is largely due to the reappointment of President Xi Jinping over the weekend which saw four new members appointed to the 20th Politiburo Standing Committee, the highest standing council in China, all of which are loyal to Xi and support the zero Covid policy. This, coupled with a renewed lockdown in China’s industrial city of Guangzhou and weak consumer related data in Q3, is stoking expectations of a still weak Chinese economy despite the upside surprise in GDP data. Today, the preliminary reading of October’s PMIs are in scope for traders at 14:45 BST, while some focus will also be given to the Japanese yen as it retraces back towards Friday’s pre-intervention lows.
The single currency popped 0.75% higher on Friday as US yields tumbled and risk sentiment improved in the afternoon. However, Friday’s session exposed the fact that upside in the euro remains fairly limited in periods of a weaker dollar despite the hawkish outlook for rates, improvement in the energy backdrop and relative stability in Italian politics. This is largely due to the looming threat of a cold winter period and the ongoing weakness in euro area growth, which will likely come back to the fore for EUR traders today with the release of October’s preliminary PMIs from Germany at 08:30 BST and the eurozone-wide index at 09:00 BST. The French measures, released this morning at 08:15 BST, saw the composite index drop from 51.2 in September to 50 in October, with weakness driven by the services sector.
The pound starts this week at the top of the G10 currency board as the withdrawal of former Prime Minister Boris Johnson from the leadership race brings forward the prospect of political stability in the UK. Johnson’s early exit leaves just Penny Mordaunt as the challenger to former Chancellor Rishi Sunak’s Prime Ministerial bid, however, with MPs already favouring Sunak in the previous leadership election, the path forward can be considered fairly clear. The question now is if the vote needs to be put to the Conservative party membership, which would extend the headline risk for traders until the end of the week, or if Sunak could find himself appointed to 10 Downing Street as early as this afternoon should Mordaunt not gain the backing of 100 MPs by the 2pm deadline today. If the latter were to occur, we expect Chancellor Hunt to remain in his current position and for the Autumn budget to take place next week given Sunak’s understanding of its importance for financial markets. Irrespective of who is appointed, the next Prime Minister will take office at a time when the cost of living crisis is starting to bite. Today’s release of October’s preliminary PMIs will likely confirm that the UK economy is heading for recession in Q4, with the services measure expected to follow last week’s soft retail sales data for September with a print below the 50 breakeven mark. The data, due out at 09:30 BST, is expected to see the services PMI drop from 50 to 49 and the composite fall from 49.1 to 48. The UK’s weak economic fundamentals are likely to keep any further GBP gains limited, irrespective of the political outcome.