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CAD
Out of all G10 currencies, the loonie has perhaps been the most interesting to us post-US elections. Market inclination to trade the loonie as a greenback-lite expression has kept USDCAD price action relatively muted. But unlike most other currencies, which have seen pullbacks and rallies, the loonie has instead seen a slow grind lower as markets slowly but progressively price in what is likely to be a significant divergence between the US and Canada. We think that rate and growth differentials should continue to widen in favour of USDCAD upside under a Trump presidency too, while the risk of USMCA being scrapped should also be weighing on the loonie. As such, we think there could be more upside for the pair in the coming months. While it might not be the explosive move seen across some other major currencies in recent days, we think fundamentals longer-term fundamentals mean the loonie is likely to underperform the broader G10 complex.
USD
As anticipated, Chair Powell delivered some distinctly non-committal responses in his speech yesterday evening. Perhaps most notably, he suggested that “The economy is not sending any signals that we need to be in a hurry to lower rates”. To us, this suggests a Fed on the verge of pausing rate cuts, ostensibly in light of recent data resilience, but with upside inflation risks from the incoming Trump administration looming large in the background. Indeed, markets have moved in this direction too overnight, with OIS pricing now implying a 45% chance that the Fed cuts rates next month, down from a high of 82% recorded in the early hours of yesterday morning. This in turn led the dollar to end Thursday trading in positive territory once again, with the DXY index re-testing the 107 level. This morning, however, that dollar strength has eased marginally, albeit we think this makes sense. The recent rally for the greenback has been explosive, and valuations look increasingly toppy. Given this, and barring an upside surprise in this afternoon’s retail sales data, we expect to see a modest dollar softening into the weekend.
EUR
EURUSD spent another day in retreat, despite a decent set of GDP figures published yesterday morning. These showed that eurozone activity grew by 0.4% in Q3, while employment rose by 0.2%. The nail in the coffin was, perhaps unsurprisingly, comments from Fed Chair Powell. Even so, the euro has bounced this morning, ahead of EU commission forecasts that are set for release at 09:30 GMT. In our view, with dollar values looking a little stretched, we can see room for some modest EURUSD upside in the short run. That said, politics on both sides of the Atlantic remains a risk for the pair heading into the weekend, a path remains open for another dip lower for the euro as well.
GBP
The pound once again traded on the back foot through Thursday, with Chair Powell’s comments ultimately seeing GBPUSD close out the day below 1.27. This morning, however, it is GDP numbers that are front of mind for sterling. These have proven disappointing, with the UK economy recording growth of just 0.1% in Q3, a significant step down in the pace of economic expansion when compared to earlier in the year. That said, a slowdown had been widely expected, with September always likely to be weak given the indications from PMI readings. Granted, the -0.1% contraction in activity seen in September was still a downside surprise relative to expectations. But this largely explained the 0.1pp downside miss for whole quarter growth. Markets have for the most part taken this latest data in stride, with GBPUSD dipping 10 ticks on the news, while GBPEUR has shed 0.3% so far today. With little in the calendar for the rest of the session, it should be a relatively quiet run into the weekend, while next week CPI should be the focus for UK watchers.