News & Analysis


The outcome of the BoC’s Business Outlook Surveys finally hit Canadian markets yesterday as Canadian yields underperformed their US counterparts, leading to a widening in yield spreads. The differential on the 2-year debt instrument widened to 41bps in favour of the US dollar, just off of recent peaks, while the 10-year spread drove close to its September heights as it widened to 65bps. With oil markets also tumbling as they struggled to hold onto their OPEC production cut gains, this resulted in the loonie falling 0.13% as some of the downwards pressure was released via a stronger equity performance. Today, all eyes are on September’s CPI report at 13:30 BST after recent data have seen inflation pressures starting to moderate in Canada. Should the inflation data meet economist expectations of a cooling in both the headline and core measures, the stage is surely set for the BoC to hike by just 50bps next week. This will weigh on the loonie, as we expected in our October forecasts, as the Fed continues to tighten policy at a faster rate. Yield differentials will therefore be key for USDCAD today.


The results of the latest Bank of America fund manager survey confirmed our view on how markets have been trading as of late. Fund managers reported an average cash allocation of 6.3% – the highest since April 2001–, a 3 standard deviation underweight position in equities, and viewed long USD as the most crowded trade. With this context, and with liquidity conditions drying up across almost all asset markets, the levels of volatility we’ve seen in markets over the past few weeks makes sense. As cracks appear in the bullish dollar/ hawkish Fed narrative, such as a weaker ISM manufacturing PMI or falling job openings, investors are trying to put their cash to work in order to not miss the next big trend in markets. This FOMO (fear of missing out) trading has increased intraday volatility in cross-asset risk conditions and continues to add resistance to further USD upside because of the greenback’s rich valuations. With the broad dollar DXY index trading over a percent below highs reached throughout the previous trading week, we don’t see the dollar as vulnerable to further downside despite the limited support from a thin data calendar this week. Hawkish Fed pricing is also likely to cap any further broad USD downside; markets are pricing just shy of 150bps of hikes this year and a terminal rate close to 5%. This has been reinforced by recent Fed commentary, with Neel Kashkari stating the Fed can’t halt its hiking cycle at 4.5-4.75% if underlying inflation is still accelerating. Today, the dollar is on the ascent against the entirety of the G10 currency board with housing data due out at 12:00 and 13:30 BST, the Fed’s beige book of economic conditions set for release at 19:00 BST, and further Fed speak at 23:30 BST.


After opening lower in Asian markets yesterday, the euro soon rebounded to close the day out marginally higher in what was a session of much-reduced volatility; EURUSD traded in a daily range of 0.64%, a feat it last achieved on September 19th. While still strained economic fundamentals leave EURUSD with a downward bias, the easing up in energy markets provided the boost yesterday. European Commission President Ursula Von der Leyen announced that EU gas storages are now at 92%, which is above the 5-year average for this time of the year, while there were reports of LNG tankers floating off of the Spanish coast as more flows were redirected than regasification terminals could process. Additionally, the European Commission has also proposed a new package of measures to improve stability within European gas markets by continuing efforts to save gas, purchase it jointly to some degree as of next year, and create a new price benchmark for LNG. The proposals come ahead of an EU summit scheduled for tomorrow. While this has helped lift the euro off of last week’s lows, it is yet to wholeheartedly improve the eurozone economic outlook as investors still voice concerns for winter months both this year and 2023. Amid a less supportive risk environment today as US yields climb slightly higher, the euro has given up yesterday’s gains and trades a third of a percent lower heading into the final reading of the eurozone CPI report for September at 10:00 BST. Expectations are for the headline reading to print at 10%, with the core reading sitting lower at 4.8% YoY.


The pound sat firmly at the bottom of the G10 currency board against the dollar yesterday in what was finally a quieter day for FX markets. Most of the speculation rested on the bond market in the morning, not only to see how it traded now the Bank of England’s support has been removed and constructive fiscal headlines had thinned out, but also because of conflicting statements regarding the Bank’s quantitative tightening plans. While volatility was somewhat higher than historical averages in the Gilt market yesterday, it remained some way off the peaks seen over the past month. Following the article in the Financial Times that morning regarding the Bank’s plans to delay QT, the Bank finally put the speculation to bed at 18:00 BST by outlining its intention to actively sell Gilts back into the market come November 1st. This date strikes us as somewhat peculiar, however, as it comes just days before the Bank’s interest rate announcement and one day after the government’s Autumn budget is released. For this reason alone, it wouldn’t be surprising if this date for QT was kicked back further into the long grass for this reason. This morning, sterling underperformance continues to be a theme. September’s CPI report has inflicted the damage today as a broad-based increase in inflation pressures culminated in lifting the headline rate to 10.1% YoY, with the core reading also ticking up 0.2 percentage points to 6.5%. While this only marginally exceeded expectations, the robust composition of the inflation report comes at a time when the Bank’s inflation forecasts will show a delayed peak in inflation and greater persistence in price growth following the government’s current plans to end the energy price guarantee after April 2023. In this regard, we find it difficult to see how the Bank of England could raise rates by less than 100bps when they meet on November 3rd, but irrespective of the decision, it will likely be sterling negative. By hiking 100bps or more, traders will have to factor a deeper, consumer-led recession in 2023. Meanwhile, a rate hike of just 75bps will likely undershoot the increase in risk premiums that markets require to make UK assets more attractive given the heightened risk levels. Given this, we continue to look for further sterling downside over the coming weeks, but note that a lot also depends on broader market risk conditions.



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