News & Analysis


Yesterday saw the loonie strengthen throughout the Asian and European sessions, before turning sharply the other way after the cash open for US equities. By the end of the day, all gains were returned, leaving USDCAD roughly where it kicked off. The same trend reversal was apparent in a number of other currencies and asset classes, including stocks and crude oil. The risk-off move did not appear to have fundamental support: US data released shortly before the equity open was broadly positive, and international securities transactions data for Canada pointed to increased foreign demand for Canadian assets (especially government paper). While we view the recent loonie weakness as unsustainable, news that China’s Evergrande Group filed for bankruptcy could keep markets in risk-off mode over the next day or so. Today, we will receive industrial product and raw materials price indices for Canada, both at 08:30 EST / 13:30 GMT.


Yesterday’s US data did little to move the dollar, with initial jobless claims failing to surprise. Arguably this should have played into a US outperformance narrative once again, as should the Philadelphia Fed business outlook, surprising to the upside printing at 12.0 against an expected -10.4. But markets seem to be taking a pause on pushing the dollar higher, the DXY index flat on the day. A similar trend appears to be in play again this morning, even in spite of more gloomy headlines out of China, a dynamic that has been otherwise dollar positive in recent weeks. The yuan has spent much of the week under pressure following an unexpected interest rate cut by the central bank on Tuesday, and news overnight that troubled property developer Evergrande has filed for bankruptcy added to this mix. But the PBoC has apparently seemingly had enough of the currency slide, ordering Banks to step up FX sales to support the domestic currency, and setting a level of 7.2006 for the daily fix. Compared with economist expectations of 7.3047, this is the largest recorded deviation from expectations, emphasising Chinese policymakers’ waning tolerance for further currency depreciation. Given this, the dollar is struggling to make headway so far this morning, seemingly threatening a repeat of yesterday’s price action.


A quiet end to a quiet week for eurozone watchers looks to be in store. Final CPI readings are unlikely to move FX markets, indeed, they are unlikely to move at all. Instead traders will likely be looking forward to next week, if not already enjoying a long weekend. Coming up, PMI data on Wednesday should provide an update on the state of the eurozone economy, and if recession is really on the cards. Beyond that, central bankers will also be gathering for the Jackson Hole symposium and their annual chinwag session. Euro traders will be looking for any hints from ECB policymakers on whether the hiking cycle is at an end or not.


Capping off a busy week of UK releases, retail sales data out this morning underwhelmed consensus with a -1.2% MoM print. This contrasted unfavourably with prerelease expectations for a more modest 0.6% decline in July, in turn coming on the back of a 0.6% expansion in June. Granted, this was likely impacted by unpleasant weather through the month weighing on consumer activity, with July the wettest seen since 2009.  But the weak numbers were still enough to send sterling into reverse. The pound dropped 0.3pp against both the dollar and the euro, as signs of consumer weakness weigh on the prospects for UK growth, and for further monetary tightening from the BoE.

FX Elsewhere

Japanese CPI data landed overnight, matching expectations across the board. This saw headline YoY price growth of 3.3% in line with last month’s print, and 4.3% on the core measure which nudged up 0.1pp from July. The ongoing strength of underlying inflation reinforced the case for BoJ policymakers to continue on the path of normalisation, a view that has seen the yen stage a modest recovery into the start of today’s session, with USDJPY falling around 3 tenths of a percent.



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