News & Analysis


While the big FX market story yesterday was the dollar rally, one major subplot was the loonie’s renewed resilience. Unlike in August, where CAD appeared to underperform in this environment despite exhibiting defensive properties throughout most of the year, Tuesday’s trading session saw the loonie outperform all of the rest of its G10 peers. While CAD did weaken by -0.4% against USD, these losses were puny compared to those sustained in other currencies. This had little to do with Canada, given the empty data calendar and meagre news flow. Instead, oil markets served as the primary driver as Saudi Arabia extended its production cuts and Russian officials formally announced the size of the cuts they hinted at last week. Saudi Arabia will now continue its 1m bpd cuts for an additional 3 months, all the way through to December, while Russia said the flow of oil exports will decrease by 300k bpd, also until year-end. Today, the focus for CAD traders shifts back to local events as the Bank of Canada takes the podium, but given the recent data flow the meeting should be relatively uneventful for markets. After one of the quickest hiking cycles in history, the Bank went on pause for four months, broke the pause this summer to add an extra 50bps of tightening, and will now likely hold rates once more. The GDP data released last week all but confirmed this outcome. While it was expected to soften, it completely missed expectations to show the economy effectively flatlined in the second quarter. In this environment, continuing to hike rates would be a huge mistake. That said, while this could be the end of the hiking cycle altogether, we don’t expect Macklem to say so. As core inflation still hasn’t made much progress since the last meeting, he will probably look to preserve some optionality by leaving the door open to hiking further if the data dictates it. But the weak growth data, alongside a softening in the labour market, rising consumer insolvencies, and shrinking corporate margins, means that inflation will probably roll over soon. The Governor will probably dial back the hawkish rhetoric, though, and emphasise the two-sided risks to monetary policy instead of honing in on inflation.


The US dollar returned back from its long Labor Day weekend yesterday full of energy. With activity data out of China and the eurozone printing below expectations once again, and Treasury yields rising on a slew of corporate bond issuance amongst other factors, the greenback’s rally in early European trading was sustained throughout the session. With the dollar’s strength resulting in USDCNY closing north of 7.30 and USDJPY finishing the day at highs not seen since the Bank of Japan’s stealth intervention efforts in November, all eyes were on the policy response out of Asia overnight. Here, some of the defence systems that were at play in 4Q22 were once again deployed, while more frequent measures were also amplified. In China, this meant the largest daily fixing error, with the countercyclical factor rising to -1139 pips, while state banks were once again mobilised in defending the yuan through selling dollars in onshore markets and draining yuan liquidity offshore. Meanwhile in Japan, jawboning from top currency official Kanda has been front and centre for markets this morning, especially as the yen climbs to level that last induced aggressive and un-telegraphed FX intervention from Japanese officials. While the measures rolled out have taken some of the edge off the dollar, with the yen naturally leading the rally this morning as concerns rise over intervention during European trading hours, their efficacy may be short-lived.

One of the dominant drivers of the dollar’s rally has been relative growth outperformance, and here developments could continue to be favourable. Not only has the market’s subjective assessment of growth conditions been downgraded further in Europe and China on the latest round of PMI data, but news that Saudi Arabia will extend its voluntary production cut into December has put energy concerns back into scope for major importers in Europe and Asia. While a tertiary story at present, the news merely adds to the cyclical pessimism that is building outside of US capital markets, especially as it shortly follows data that suggested the global manufacturing recession may be bottoming out. Later today, growth conditions will remain top of mind as the ISM services PMI is released in the US at 15:00 BST before the Fed’s beige book of economic conditions is published. Here, any strength in the overall activity measure, prices paid or employment sub-index will likely spark a renewed dollar bid via a rally in either front-end or back-end Treasury yields.


Yesterday’s session saw the euro in retreat against the dollar, down 0.65pp, caught between a double whammy of broad greenback strength and weakening euro-area sentiment triggered by a downgrade to August PMIs. Final readings were revised down across France, Germany and the eurozone as a whole, with the first release of Italian and Spanish readings now joining Germany and France in sitting below 50. The consequence for aggregate eurozone PMIs was that the services measure fell from 48.3 to 47.9, leading the composite to also slip from 47.0 to 46.7. This not only indicated a further slowdown in economic conditions in the bloc, but one that appears increasingly broad based, adding yet more to fears of the eurozone falling into  recession over coming months. If realised in combination with sticky inflation, the stagflationary dynamic will be deeply unattractive for the blocs investability will weigh on investor sentiment, portfolio flows and therefore euro strength in turn. Given this, sentiment around EURUSD has become unsurprisingly more bearish, even as the move lower in spot markets seems relatively contained. In the options space, however, deep out-of-of the money puts becoming increasingly more expensive. Put another way, the likely range in which EURUSD will trade over the next 3-months, as implied by options markets, has dropped two big figures lower to 1.04-1.12.

With the euro likely to continue dancing to the broad dollar’s tune today, European FX traders will likely turn their attention to the satellite currencies. Here, the Polish zloty will be the currency subject to the most attention as today’s National Bank of Poland meeting holds a credible risk of premature easing. Economists are split down the middle on the likely outcome for the meeting, though in our view, with CPI inflation still north of NBP President Glapinski’s 10% target, the balance of risks is tilted marginally towards a hold in rates. That being said, we would not be surprised with a cut in rates either given the central bank’s typically dovish reaction function, meaning today’s setup is one of uncertainty, and likely significant volatility for the zloty.


Price action through yesterday’s session saw sterling lose ground against the dollar in the face of yet another wave of dollar strength. On the domestic front, news out of the UK was something of a mixed bag, with the pound failing to pick up support against the dollar from upwards revisions in August’s flash PMI readings, however, this did see sterling outperform the euro once again as the revisions contrasted with downgrades in the eurozone’s readings. Traders could have been forgiven for overlooking data when trading GBPUSD, not only because of the broadly supportive dollar dynamics at play but also the deluge of political stories with implications for government spending that hit the airwaves on Tuesday. First, the concrete crisis affecting many public buildings in the UK, notably schools, continues to rumble on. Whilst no one seems to know how much it would cost to remedy, we are pretty sure it would blow a hole in the government finances and lead the Chancellor to miss his fiscal targets. Second, Birmingham city council declared effective bankruptcy. This was notably different to similar developments at other councils, which were largely a function of mismanaged investment projects. Finally, there was news that the Autumn statement would be delivered on 22 November, just a week after inflation and wage data should show a significantly improved picture of the UK economy. In sum, these developments are putting increasing focus on the state of UK public finances, which look increasingly grim for the government. Whilst not a market moving story in the moment, the bleak mood music is likely to weigh on investor sentiment on the UK, providing a drag on the pound over the medium term. For today though, focus is likely to shift to BoE Governor Andrew Bailey, appearing in front of Parliament alongside MPC colleagues Jon Cunliffe and Swati Dhingra. Whilst these events have a track record of proving underwhelming, Bailey may choose to double down on last week’s comments from Chief Economist Huw Pill, indicating a preference for a “Table Mountain” profile for Bank Rate. If so, this should see a sell off in near term Bank Rate expectations, which could in turn drag sterling lower again today, though longer term we expect the impact to be broadly net-neutral as markets align with a high for longer view.



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