News & Analysis


The loonie was yesterday’s biggest loser on the G10 currency board, falling 0.3% against the greenback on a slowdown in core inflation and a 1.9% pullback in oil prices. Total inflation spiked, rising 0.7% MoM in October after a muted 0.1% print in September to hold the headline YoY figure at 6.9%, leaving the debate over 25 vs 50bps at the Bank of Canada’s December meeting wide open. That said, Governor Macklem said at the October decision’s press conference that he was closely watching the 3-month moving average of core inflation. We calculated that measure using StatCan’s inflation series that excludes food and energy, finding that on an annualised basis, core CPI has averaged 2.8% over the last three months, down from 3.7% at the time of the previous report. Furthermore, over half of the inflationary pressure was driven by higher prices at the pump, prices that have already begun to come down in November. Given the positive picture in the core data, we continue to expect the Bank of Canada to raise rates by 25bps in December.


Dollar downside continued to be the prominent theme in FX markets yesterday, with the DXY index falling closer to 106 after notching losses of around a third of a percentage point. This morning, similar to Monday’s session, signs of another consolidation in the dollar drawdown are apparent after an overnight session that was primarily characterised by a stronger dollar against APAC currencies. Price action in USDCNY is the most notable in this regard, with the onshore rate climbing 0.4% overnight amid news that authorities are asking local banks about their short-term obligations after a rapid sell-off in fixed income products. While the developments, which are driven by retail investors repositioning into riskier assets given signs of economic support and gradual reopening, are arguably having a limited impact to date, it highlights how further dollar downside is starting to take a more selective approach. Today, another swathe of Fed speakers are set to hit the wires, with Bullard at 13:00 GMT and Mester on financial stability at 14:40 GMT arguably the most important.


Valuations are coming to the fore for the euro at current levels after two successive attempts at July’s high in as many days have borne no fruit. Today, the euro’s placid price action is notable within the G10 space, highlighting again the level of resistance that remains to the upside. Focus for today will rest on the final reading of October’s CPI data, which is expected to print unchanged at 10.7% YoY at 10:00 GMT, while price action in the pound will also be monitored for any cross-related spill overs into EURUSD. Outside of that, ECB member Francois Villeroy is set to speak at 15:00 GMT.


Sterling continued to rally against the dollar yesterday, but remained some ways off Tuesday’s highs as the decline in the broad dollar began to settle. The move in the pound once again fell in line with broader G10 price action despite the publication of domestic top-tier economic data. This is largely due to both labour market and inflation data causing little disruption to the Bank of England’s path for rates in the near-term. Today, domestic economic events may again prove to have a limited effect on UK markets, as this is the ultimate desire of Chancellor Hunt following the tumultuous mini-budget that preceded him. In an effort to align fiscal policy more tightly with monetary efforts, the Chancellor is set to outline fiscal consolidation of around £50bn per year in his Autumn statement at around mid-day today. The cost savings are expected to be split 60/40 in terms of higher taxes and lower public spending, with key policies such as freezing income tax allowances and thresholds along with raising council tax payments already known to markets. The main risk is that bond markets are underwhelmed by the level of fiscal consolidation and start to factor in increased issuance over coming years, pushing up gilt yields yet again and exerting renewed pressure on GBPUSD to clear the imbalance. Additionally, with sterling currently trading at highs not seen since mid-August and meeting resistance less than a percentage point higher than current spot levels, renewed downside may be the path of least resistance for GBP today.



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