News & Analysis


While G10 markets proved fairly frothy in yesterday’s market, the loonie continued to trade in relatively tight ranges as it fell just 0.34% against the dollar. Despite USDCAD coming close to the upper bound of its 1.17% range that has been intact since October 15th, the decline in front-end Canadian bond yields close to the 1% mark failed to push the loonie too much, especially as equities and oil remained supportive. Today, however, the Federal Reserve could force USDCAD to breakout to the upside given the right mix of policy tightening and commentary from Chair Powell, however, the possibility of the Fed under delivering on a hawkish message also remains a viable risk. In which case, markets will have to look towards Friday’s labour market data for a narrative to potentially stimulate a USDCAD breakout.


Focus was on the broad US dollar in yesterday’s session as Treasury curves bull steepened and the dollar posted gains against all G10 currencies with the exception of JPY, which found relief in moderating core yields. Today, it will be much the same in regards to the dollar calling the markets’ tune as investors prepare for tonight’s Federal Reserve meeting at the earlier time of 18:00 GMT due to clock changes. While the focus of the meeting is largely known, that is QE tapering, there remains some ambiguities around the Fed’s pace of tapering and the sequencing of normalisation thereafter. While Chair Powell outlined in September’s meeting that the pace of tapering would be such that purchases will halt by the middle of next year, concerns over more persistent inflation have raised the risk of the tapering process being faster than $15bn a month to fit the previous timeline. This would be a hawkish development given how strong the sell-side consensus is over the pace of tapering. Additionally, some have raised the prospect of the Fed announcing plans to reduce its balance sheet by outlining the sequencing of its normalisation cycle; that is, explicitly outlining at what point of the hiking cycle would it begin to wind down its balance sheet similar to what the Bank of England announced in August. While we think the US central bank won’t deliver a hawkish message via these avenues, largely because it will undermine their previous messaging and their new inflation targeting framework so early on, a more hawkish tone by Chair Powell in the press conference could be in store. How a subjective tone plays out in bond and FX markets is debatable, especially given the churn in front-end rates thus far, meaning the only given for tonight’s meeting is more market volatility.


The single currency’s losses were largely mitigated by declining G10 yields in yesterday’s market, with EURUSD sitting towards the bottom end of the pack against the dollar as losses only just exceeded 0.2% on the day. This morning, a slight slip in manufacturing PMIs across most of the core eurozone countries, with the exception of Italy, has done little to dent EURUSD as the broad US dollar unwinds some of yesterday’s gains. Events for the most liquid currency pair are fairly light today, with the two standout events coming in the monetary policy space. ECB President Lagarde is expected to speak at the 175th anniversary of the Bank of Portugal at 09:30 GMT, but comments about upcoming monetary policy measures are unlikely. Then, the Federal Reserve are to announce their latest policy decision, which could prove instrumental for front-end yield spreads, especially if the Fed strikes a more hawkish than expected tone and the ECB limits the contagion of rising US Treasury yields via increased PEPP purchases. The single currency is trading just 0.5% shy of recent lows and those levels could be in sight later this evening should the Fed show a greater sensitivity to the recent inflation backdrop.


Broad USD strength extended sterling’s decline yesterday, with GBPUSD closing the session 0.37% lower on the day. With very little on the data calendar, the bull steepening in global yield curves, led by Australia’s yield curve following the RBA meetings, was the main dynamic in yesterday’s market. However, today the focus switches back to central banks and their interpretations of both economic and financial conditions. The Fed meeting tonight could prove influential for GBPUSD, not just on a spot basis due to the shift in the broad dollar, but also the forward curve and how far out the inflection occurs. On the data calendar today is also the final reading of the services and composite PMIs for October at 09:30 GMT, with October’s Nationwide house price index already released this morning. The data showed renewed growth in house prices, but the month-on-month measure is notoriously volatile



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