News & Analysis


Last week’s economic developments breathed life back into the Canadian dollar, and the resumption of larger daily price moves persisted yesterday despite very few local headlines. Instead, it was a vastly improved cross-asset risk environment that led USDCAD back below last week’s opening price–a move we think can extend further given the pair currently trades above where its fundamentals place it. However, an extension of USDCAD downside will likely need tomorrow’s US inflation data to print in line with expectations, thus leading markets to trim the tail risk of a further hike from the Fed this year, or August’s Canadian CPI report on the 19th to show renewed progress on core disinflation. Given the BoC now faces a stagnant growth outlook, as per Q2’s GDP report, signs that core inflation pressures are once again cooling will likely boost Canadian real yields and its investment outlook even as it will weigh on nominal yields. On net, we expect this to be a CAD positive outcome over the medium-term.


After an explosive start to the week yesterday morning, which markets had alluded to with their short dollar bias heading into the weekend on Friday, market volatility generally stabilised with the dollar DXY index closing half a percentage point lower. The general bid in risk assets has largely continued this morning after news overnight that China’s Country Garden is set to get a reprieve on bond payments, an outcome that has lifted the stock price by 5%. However, this hasn’t translated into a continuation in the dollar’s decline as the DXY index bounces 0.11% to trade back in line with our one-month forecast. The disjointed cross-asset price action once again highlights just how many conditions must be met for the dollar to sustainably decline, an outcome we don’t expect until 2024.

Generally speaking, today is set to be a quiet session ahead of tomorrow’s August CPI report and Thursday’s blockbuster ECB meeting. On the calendar of note is the US NFIB small business optimism release, which will be closely monitored to assess how small firms’ are viewing consumer demand conditions and what their subsequent hiring intentions are, while OPEC’s monthly oil report is also released. On the latter, lower production figures would underpin the recent rally in crude, with WTI holding above $85 per barrel, a level it breached last week on news that Saudi Arabia would extend its voluntary production cuts.


Given how close the upcoming ECB decision is, it is notable how quiet the usual ECB sources have been. Usually in times where there wasn’t unanimity in the upcoming decision, Governing Council members would take to the airwaves during the formal communications blackout under the guise of anonymity to push markets into pricing in their views in an effort to force the hand of the overall council. With markets pricing just a 40% probability of a 25bp hike, it is thus the hawks that have been quiet, although this isn’t necessarily to say that no such headlines won’t be forthcoming ahead of Thursday’s decision. While the ECB sources stories have been absent, that isn’t to say there were no headlines out of the eurozone as yesterday the European Commission downgraded its forecasts for 2023 and 2024 by 0.3pp to 0.8% and 1.3% respectively. While that comes as no surprise to markets given the downgrading to Q2 GDP figures and the string of bleak PMI readings, it underscores the predicament the ECB finds itself in–whether to hike further or hold given the worsening growth outlook–and the restrictions to EURUSD upside.


UK labour market data out this morning had been seen by many as key for the Bank of England. Given this, a largely on expectations print for both unemployment figure and wages has done little to shift market pricing for Bank Rate, and therefore, the pound. Granted, the headline average weekly earnings figure came in 0.3pp above expectations at 8.5% on a 3m/YoY basis. But the normal private sector wage growth figure that is closely watched by Bank Staff and MPC members actually ticked down by 0.1pp from an upwardly revised June reading of 8.2%. With the anticipated signs of labour market softening playing out elsewhere in the release, most notably in unemployment which now stands above the BoE’s estimate of neutral at 4.3%, there is a growing case that the peak in wage growth and therefore underlying inflationary pressures may now be in for the UK economy. In our view, with wage growth remaining elevated, the BoE will still likely hike at next week’s meeting. But another round of cooling data is likely to make this the final hike of the cycle, for a terminal level for Bank Rate of 5.5%.



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