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CAD
As we mentioned earlier this week, the data calendar in Canada is dry until Thursday and Friday. This meant that the latest developments in the loonie were US-driven, with the most crucial event being the release of the latest JOLTS survey. The survey showed a much quicker-than-expected cooling in job openings, which have been abnormally high since Covid started. As a result, Fed expectations and yields fell across the board, driving a surge in equities and broad dollar pullback that benefited CAD. But even then, the loonie underperformed most of the G10, failing to catch as strong of a bid as other currencies are now viewed as having greater sensitivity to risk appetite. In the news, Bloomberg reported that several Canadian banks have now offered more than 40% of new mortgage-holders amortisations extending beyond 25 years. Of course, the trend of longer terms has been well known to markets for months, but it’s always interesting to see confirmation in the hard data. We do not view this risk as particularly salient in the near term, but rather as a growing vulnerability that could create negative repercussions in the years to come.
USD
After a flat start to the week, FX volatility came back with a bang yesterday in a session that was predominantly driven by developments in the bond market. While the day started with APAC equities trading in the green following further stimulus measures out of China, which were compounded after hours when authorities directed banks to lower rates on existing first time buyer mortgages, in FX markets the dollar traded relatively unscathed. As the European session evolved and US traders started to get to their desks, the underlying bid in the dollar picked up pace as Treasury yields rallied across the curve. The rally in the dollar was sustained up until July’s JOLTS job openings and August’s Conference Board consumer confidence data printed considerably below expectations. Starting with the JOLTS data, which in our view largely drove the response in markets, at 8.827m the number of job openings now sits at its lowest level since March 2021. However, it wasn’t just the level that shocked markets, but also the pace of the decline. Due to revisions to the June data and the continued moderation in labour demand, the number of reported job openings in July is now 755k below June’s first reading. What makes this even more impactful is the fact that the JOLTS data has proven sticky even as the pace of overall payroll growth has slowed. Compounding the readthrough for markets was the narrowing in the Consumer Board’s labour differential (jobs plentiful less jobs hard to get) and the cooling in overall consumer confidence. With Chair Powell emphasising that a softening in the labour market was required to keep inflation on its downward path at Jackson Hole last week, the latest round of US data came as welcome news for markets that are becoming increasingly confident that the Fed has orchestrated a soft landing. The bull steepening in the US Treasury curve that ensued following the data led global equities higher and took a dent out of the dollar, with yield sensitive currencies benefitting the most.
Whilst eurozone inflation is likely to be front and centre for markets this morning, a raft of releases out of the US later on is likely to also be critical for price action in the FX space. ADP employment data will be a notable data point to keep an eye on, in light of the latest JOLTs figure. Whilst the series volatility means we are sceptical of its ability to reliably reflect the state of the US labour market, a weak print would reinforce a narrative that the US jobs market is softening faster than expected, and could see traders double down on yesterday’s moves. Outside of this, a second reading for Q2 GDP is unlikely to hold many surprises, whilst inventories data should show signs of moderation in July, though neither is likely to move markets unless they deliver a significant surprise.
EUR
The single currency’s sharp U-turn around yesterday’s US data revealed EURUSD’s sensitivity to yield spreads once again. With Treasury yields declining following signs the US job market continued to normalise, the 2-year spread between US Treasuries and German Bunds yields narrowed by 13bps, bringing the measure off its recent highs. In doing so, this dragged EURUSD 0.56% higher on the day and away from lows last seen in mid-June. The move was also notable given sentiment over the single currency has progressively been getting more bearish since the bleak batch of PMIs midway through last week.
Today, the focus for euro traders will yet again be on the bond market with Spanish and German inflation data released ahead of French and eurozone composite figures tomorrow. Thus far, the news has been supportive of a September hike from the ECB, with Germany’s most populous region exhibiting a significant uptick in the pace of sequential inflation, from 0.2% to 0.5% MoM, while Spanish inflation also rose, with the headline measure increasing 0.3pp to 2.6% YoY. In Spain, this equated to a 0.5% MoM increase in prices in August, up from 0.2% in July, marginally more than expected. However, much of this came as the result of rising wholesale energy prices. Nevertheless, a similar pattern was true in the core year-on-year number, where a 6.1% increase in costs was also fractionally above pre-release consensus. While on the surface this doesn’t bode well for those in the ECB’s Governing Council looking to hold the deposit rate at the September meeting, it is worth noting that the 3-month average pace of core inflation in Spain is tracking at a 2% annualised rate. With the German national figure not released until 13:00 BST, and the core number needing to be backed out manually by analysts, it is likely that the rally in eurozone bond yields persists throughout the morning session. Should the German figure corroborate the early signs that eurozone inflation hasn’t wholeheartedly turned a corner, we will likely update our call for one further hike in September.
GBP
Despite BRC shop price data out yesterday morning pointing to continued falls in UK inflation, it was ultimately US JOLTS data that really moved the needle for sterling in yesterday’s session. The weak jobs print saw sterling finish 0.35pp up against the dollar. But the pound also fell two tenths on the euro as the single currency found greater support against the greenback, reversing the trend of recent weeks that has seen sterling of the relative outperformers in the G10 complex on the prospect of American outperformance and higher long term US rates. Today though, the focus for sterling traders is likely to turn to the UK housing market, with two key data points of note hitting the wires. First, data from Zoopla has suggested that the rate of house price sales has hit the slowest since 2012, as higher mortgage costs weigh on buyer demand. On this latter point, UK borrowing data, in particular the number of mortgage approvals in July, is due to be published at 9:30 BST. This is likely to confirm what is seen in the Zoopla data and elsewhere, that housing demand continues to soften. Despite this, with house prices yet to drop off a cliff, this looks like a market seizing up, rather than signalling a property market going into freefall. If realised, this is likely to leave sterling in a holding pattern, with markets still waiting to see the next UK specific driver for the pound.