News & Analysis


The Canadian dollar continued to trade near lows not seen in 22 months yesterday as pressure remained on the loonie from both rising US rates and the decline in crude oil prices. Despite the upward bias in USDCAD, the loonie rebounded in the afternoon of yesterday’s session on the bid in equities, resulting in USDCAD erasing earlier gains and closing 0.2% lower on the day. This morning, the loonie has traded close to flat against the US dollar, putting it at the middle of the G10 currency board despite the positive risk tone from equities. On deck today we have a Canadian CPI report for August at 13:30 BST / 08:30 EST, which is expected to show a one-tenth decline in one-month momentum to bring the year-on-year headline figure three-tenths lower to 7.3%. The more important development for the Canadian currency will be whether the average of the Bank of Canada’s three preferred measures of core inflation rises or falls from 5.3% YoY.


FX volumes were fairly light in the European session yesterday as London remained closed for Queen Elizabeth II’s funeral, meaning most of the volatility was reserved for when US markets came online. Positioning for this week’s deluge of central bank decisions, especially the Federal Reserve on Wednesday, was the main driver in yesterday’s session as yields rose across the board. Despite more hawkish expectations of the Fed being priced in across a multitude of US rates, the dollar erased most of its gains at 20:00 BST when a bid in equities boosted cross-asset risk appetite. The dollar ultimately closed out stronger against the majority of the G10 currency board, sustaining losses against GBP, EUR, AUD and CHF. Today, the dollar continues to trade in a bifurcated manner; weaker against most European currencies excluding NOK, while stronger against the APAC region following a continued slide in the Chinese yuan and rising Treasury yields. Flow is likely to continue dictating the dollar’s price action today amid a sparse calendar in the run-up to tomorrow’s Fed meeting. On that topic, markets are pricing a roughly one in three chance that the US central bank raises rates by 100bps.


The single currency has continued to improve slightly, extending mild gains that make it one of the better performers in the G10 over the past five trading days. Nevertheless, the EURUSD pair continues to trade near parity in a range that has been maintained since mid-August and was only briefly escaped for a few days last week. The euro’s latest leg higher is supported by positive risk sentiment in equities and reports that Ukraine’s military had pushed further east to recapture more territory abandoned by Russia. This initiative could allow Ukrainian forces to mount an assault against occupation soldiers in the eastern Donbas region. This morning, German producer price index data for August printed at 7.9% MoM and 45.8% YoY, prints that substantially beat expectations. The main driver of the beat was higher energy prices, which rose 139% YoY for corporates at 278% YoY for energy suppliers. This has had a limited impact on the single currency, with most of the focus resting on the region’s current account data for July at 09:00 BST and President Lagarde’s speech at 18:00 BST. These events could be overshadowed, however, by the latest Swedish Riksbank policy rate adjustment at 08:30 BST, which should see the pace of Swedish interest rate tightening to accelerate with a 75bp hike.


Liquidity in GBP crosses was notably light in yesterday’s session with London closed for the day, but that didn’t stop the pound from recording a gain of 0.36% against the dollar and sustaining those levels this morning once liquidity conditions improved. Pricing in UK money markets is likely behind the stronger levels in the pound as traders now price two 75bps hikes from the BoE by year-end, with 200bps now priced in over the course of the next three meetings. Last week’s data didn’t tip the balance for us, and we still expect the BoE to hike by 50bps this week, but risks of a 75bp hike still remain as the central bank will be acutely aware of the inflation threat posed by the new fiscal measures. With a mini-budget pencilled in for Friday, we think the prospects of the BoE ramping up the pace of tightening are skewed towards Q4. Whether the Bank’s decision to hike by 50bps this week will be considered underwhelming by markets depends on the relationship between OIS pricing and GBP, which has not been stable thus far this year. Given this, the most notable source of volatility this week will likely be the mini-budget presented by Chancellor Kwarteng on Friday, especially as current account dynamics have been at the forefront of trader’s minds when it comes to the pound. Beyond the cornerstone fiscal and monetary events this week, August’s public sector net borrowing data and September’s preliminary PMIs populate the data calendar. The former is unlikely to have a huge market impact, but this will change later in the year as the government’s financing requirements come back into scope as the latest fiscal policies leave the liability side of the balance sheet exposed.


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