The loonie surged by half a percentage point in yesterday’s trading session as quarter-end portfolio flows tore the US dollar apart in FX markets. In addition to broad USD weakness, the data out of Canada highlighted that the recovery was within 5% of its pre-pandemic level as July’s GDP saw the economy grow 3% month-on-month. However, one caveat is that a lot of the bounceback in July’s GDP came from areas of social consumption, which are likely to be hit hardest by localised lockdown measures during the colder months. Additionally, the Statistics Canada preliminary estimate for August’s reading suggested the rebound slowed substantially to a pace of 1% MoM. As the recovery enters this recuperation period, growth is set to slow further and become more uneven across sectors. The Bank of Canada expects just this and has kept ammunition in the form of its QE programme to counter any signs of the recovery stalling, meaning eyes will now shift to more timely data and the activities of the central bank’s open market operations. With one hurdle out of the way for the loonie, the focus then shifted from GDP data to oil markets ahead of the Department of Energy inventory release. With WTI trading below $40 per barrel and expectations suggesting inventories rose last week, the news of a 1.98m barrel drawdown came as a welcome relief and allowed the loonie to maintain its rally against the dollar. The drawdown in crude inventories was more than enough to offset the slight build in gasoline inventories, which tends to be a good proxy for demand conditions at the pump. With two hurdles cleared, the loonie clung onto most of its gains to close out the session on the front foot. This morning, with the dollar weakening across both G10 and EM FX markets, the loonie has built on yesterday’s momentum to continue retracing last month’s losses.
Q3 was a quarter to forget for the US dollar, which fell by 3.60% as measured by the broad dollar DXY index. While most of the damage to the dollar was inflicted in July when global growth started to pick-up at a time when the US economy was embattled with the outbreak in the Sunbelt strip, yesterday’s session was a stark reminder for USD bulls that the tables can turn sharply. Despite the dollar finding a renewed wave of support in the last few weeks, as the risk-off channel remains intact, quarter-end portfolio flows saw US equities rally, treasuries yields climb and the dollar sell-off en masse in both G10 and EM FX spaces. Focus has quickly shifted to the US election after Tuesday’s debate between both President Trump and Democratic candidate Biden, along with the progression of fiscal stimulus. Overnight, Treasury Secretary Steven Mnuchin said he and Democrat House Speaker Nancy Pelosi “made a lot of progress in a lot of areas” as talks continue over the next round of fiscal stimulus. House Democrats delayed the vote on their $2.2trn proposal to give negotiations one more day, however, major investment banks such as Goldman Sachs have begun to voice their opinion that pre-election stimulus is not likely. With the House session set to end this evening prior to the election, it is increasingly unlikely that another round of fiscal stimulus won’t be released, which may continue to weigh on the dollar as it trades lower in today’s session already.
The euro is trading on the back foot against risk-on currencies like NOK, AUD, NZD and CAD this morning but rose to a 1-week high against the US dollar following broad-based selling in the greenback. Today is all about the EU summit, where Angela Merkel is expected to address the progress of the EU recovery fund after headlines mentioned the threat of a potential delay in the ratification. The target date for the EU’s virus recovery fund stands at January 1, but Germany warned that disputes over the governance of the fund make it challenging. While any signs of a delay would be a downward risk for the euro this month, the narratives around the US dollar regarding the prospect of the US elections and the general global risk environment remain highly relevant for EURUSD price action as well. This morning’s data calendar for the eurozone included mixed Purchasing Managers’ Index releases from the eurozone. The Netherlands, Spain, Italy and France saw minor improvements in the manufacturing PMIs since August’s releases, while Germany’s figure fell for this month. The PMI data passed largely without incident however, given that headlines around the EU summit, the US fiscal stimulus package and Brexit remain in the spotlights. The remainder of today’s eurozone calendar includes the eurozone producer price index figure and the unemployment rate, both scheduled for release at 10:00 BST.
Sterling took a sharp knock this morning and is trading lower across the board, after Reuters released a scoop report saying that this week’s round of trade negotiations had failed to achieve a breakthrough on state aid. Talks are ongoing today, however, and an update is expected tomorrow when they conclude. The report, citing anonymous officials and diplomatic sources, said that although the bloc had become more hopeful that Prime Minister Boris Johnson was looking for a trade deal, a final agreement “will be contingent on the withdrawal of the internal market bill”. The internal market bill, which has progressed through the Houses of Parliament without any serious blocks so far, contains provisions which potentially breach last year’s withdrawal agreement. Yesterday was the deadline the EU set for the withdrawal of the offending clauses, and European Commission President Ursula von der Leyden will reportedly give details of the EU’s legal response to the UK action today at 12:00 BST. This morning at 09:30 BST, manufacturing purchasing managers indices will be released by Markit, and at 11:20, Bank of England Chief Economist Andy Haldane will speak.