News & Analysis


The loonie fell half a percent on Monday despite strength in equities. The move appears to be driven mostly by rates and oil. The spread between US and Canadian 2Y bond yields widened another 5bps, with the US note now yielding 36bps more than its Canadian equivalent. In the 10Y space, the spread widened 6bps, putting the US bond 68bps ahead of the Canadian bond. WTI crude oil fell half a percent to the $84 handle. Today’s economic calendar is empty for Canada, but tomorrow we’ll get the latest Bank of Canada decision. Economists are divided between 50 and 75bps, with the consensus drifting slightly toward 75bps in the last few days. We’re on the more dovish side with our expectation of a 50bp hike, as we believe that financial stability risks have grown considerably, especially in the housing market. Nevertheless, 75bps is a substantial risk given that the latest inflation report showed broad price gains in most sectors.


The dollar traded sideways with little volatility on Monday despite a 1% rally in US equities. Treasuries sold off slightly, with yields up 2-3bps across the curve. The main event of the day on the US side was the release of preliminary PMIs for October. The composite reading dropped sharply from 49.5 to 47.3, falling deeper into contraction territory. Excluding the pandemic, that marked the second-fastest monthly decline since 2009. The composite decline was mostly driven by the services index, which fell from 49.3 to 46.6. The report noted that weaker demand led private sector firms to trim back on hiring. This is in contrast with the trend in BLS data that showed a substantial rise in employment last month, but is consistent with the recent reduction in job openings. The report also had a few interesting points on the inflation front. Input price growth picked up following four months of softer gains, driven by interest costs, material shortages, and wage pressures, but competitive pressures led firms to cut some costs, such as transportation. With competition driving margin compression and price cuts, the disinflationary effects could prove longer lasting and poses downside pressures to the resurgence in core inflation pressures. This morning, the dollar continues to trade on a lighter footing as equities in Asia recover overnight, while there is little pushback from US yields as the Federal Reserve embraces a media blackout period before next week’s decision. Today, the key data release out of the US is the Conference Board survey at 15:00 BST / 10:00 ET which will give fresh insights into the level of confidence in the consumer just a day after the services PMI highlighted a deteriorating demand outlook.


The decline in the euro area PMIs in yesterday’s flash readings for October had little bearing on EURUSD yesterday as at current levels, a recession is already embedded into the price. Instead, it was a softer batch of US PMIs, that subsequently weighed on core yields and boosted equities, that prompted a stronger reaction in EURUSD. The pair remained trading close to its daily highs following the 0.45% rally in the aftermath of the US data as near-term gas prices continued to fall due to storage limitations. This morning, negative sentiment returns to EURUSD ahead of the release of German IFO data at 09:00 BST. It must be noted, however, that despite the daily swings, the currency pair remains well within recent ranges.


All eyes were on Westminster yesterday as traders awaited the latest news from the Tory party leadership race. Just prior to the 2pm cut-off, where leadership hopefuls required the backing of 100 MPs to progress and be put in front of the Conservative party membership for appointment, leading contender Penny Mordaunt withdrew her candidacy to clear the way for Rishi Sunak to become the next Prime Minister. Similar to the market reaction on Friday following Truss’s resignation, the reaction in FX markets was limp as any prospect of a risk rally was put in check by the weak underlying economic fundamentals, to which the new government has little wiggle room to provide support following the mini-budget. The weak economic fundamentals were put on show just prior to Sunak’s appointment, as October’s flash PMIs saw activity in the services sector contract quite significantly, weighing on the composite measure. Testifying to Parliament yesterday, BoE Deputy Governor Dave Ramsden said the PMI data out that morning was consistent with the UK economy being in recession. With the pound facing firm resistance, the main reaction occurred in the UK government debt market, where 24-31bps were priced out across the curve as Sunak’s conservative stance on budget deficits left many pricing out some of the risk premia embedded into Gilts over the past month. This morning, traders in Europe woke up to news that Chancellor Hunt will likely remain in his position under the new administration, as we had expected, while a decision on the progression of October 31st budget is under review. In combination with the improved risk tone in the cross-asset space, this will likely keep the pound slightly bid this morning as Gilt yields tumble further. Today, the main data release focuses on the consumer outlook again with the release of October’s CBI business optimism and total sales trends data at 11:00 BST. As a second-tier piece of data, it is unlikely to jolt GBP too significantly, unless it shows a complete capitulation in demand conditions.



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