News & Analysis


The loonie spent much of last week in reverse against the dollar, with USDCAD rising around 1% into Friday’s jobs numbers release. While much of the attention was focused south of the border, a soft Canadian number added to the growing body of evidence for a forthcoming BoC hold. Granted a broad slowdown had been anticipated, but with the Canadian economy losing 6.4k jobs on net over the course of July, the data offered a clear signal of softening in the labour market. If this trend can be sustained into the BoC’s September meeting, then a modest undershoot of current market expectations could continue to weigh on the loonie at the margin. On the other hand, the July rally in oil prices and a Fed that is also likely to hold rates in our view provides an environment that should be broadly supportive for the Canadian dollar in the near term, with any catalysts for a retracement of recent moves likely to emerge couth of the border, US CPI on Thursday is the main event to keep an eye on this week.


Summer is now in full swing for markets, meaning less commentary and limited liquidity look likely to be the name of the game across much of the FX space. That does not mean everything has ground to a halt however, with last week’s jobs data once again painting a less than clear picture of the US economy. The divergence between establishment and household surveys once again left traders much to chew over, with a 0.1pp tick down in the unemployment rate contrasting with a modest undershoot in the headline nonfarm payrolls measure, printing at 187k vs 200k expected. This put a halt to the recent dollar rally which had seen the DXY index grind almost 3% higher since mid-July, with markets likely waiting to see this week’s CPI data before deciding on the next leg for the greenback. Indeed, US CPI likely to be the main risk event of the week, with expectations currently foreseeing a 3.3% YoY increase in prices for the headline measure, and 4.8% for the core number. If realised, this is unlikely to change any minds at the Fed, but an upside surprise with labour market data continuing to show signs of robustness could lead markets to renegade with the idea of a final rate hike this year in line with Fed guidance, pulling the greenback higher in turn. Before then, we will be keeping an eye on bid-cover ratios for US treasury auctions, especially given last week’s price action, alongside any further commentary out of the Fed, although markets appear to have substantially discounted the latter for now.

Elsewhere, Labor cash earnings data out tomorrow morning looks set to keep the pressure on the BoJ to continue normalising policy, following the somewhat dovish easing of yield curve control. The new approach of yield curve guidance has yet to produce a marked pickup in Yen strength, but the currency is notably off YTD lows against the dollar that had triggered central bank intervention. Meanwhile, inflation data out of China on Wednesday morning is also likely to underscore both the need and the wisdom for further economic stimulus. With that being said, FX markets are likely to want to see evidence of action from the relevant authorities before reengaging with typical Chinese growth trades, having been broadly disappointed with actions over recent weeks.


Whilst not entirely barren this week, the eurozone data calendar is still rather sparse this week, providing little hard information for markets to sink their teeth into. Indeed, outside of US CPI data, there looks little that could break EURUSD out of current ranges following the pair’s slow grind lower over the back end of July. Instead, euro watchers are likely to spend time looking for a steer on the likelihood of a September rate hike from the ECB. Current expectations currently foresee a roughly one in three chance of this occurring, but as of yet there has been little commentary from the governing council to shift markets one way or the other, in sharp contrast to the consistent hawkish messaging that had predominated prior to the last policy meeting. Granted it is summer in Europe, but right now the silence out of the ECB is deafening, and markets are likely to continue drawing their own conclusions on the probability of further rate hiking from the ECB in the absence of any further commentary, which should continue to weigh on the euro.


Having slowly ground lower since mid-July, the pound opens the week lower against the dollar once again, down around two tenths, whilst holding ground against the euro. This week, the fallout is likely to continue from last Thursday’s Bank of England meeting, with markets looking to gauge the ultimate end for the BoEs hiking cycle. In our view, this is likely to come in September with a final 25bp hike, with an accumulation of data ultimately allowing the Bank to pause by the time of the November meeting. Not that markets are likely to see much that convinces them one way or the other in the next few days. Although a new RICS survey and preliminary Q2 GDP are coming up, with the latter expected to show the UK just about dodging contraction in Q2, neither are likely to hold much in the way of a surprise. Instead it is likely to be central bank commentary that catches the attention of FX markets, starting with BoE chief economist Huw Pill speaking at 17:00 BST today.



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