News & Analysis


After starting the day flat-footed, the loonie posted a strong rally yesterday that began at the start of the North American trading session and consolidated mid-morning, Toronto time. From trough to peak, CAD strengthened by 1% against USD, and after netting off its overnight losses, the loonie closed three-quarters of a percent stronger than the day before. The move tracked near-perfectly with the rally in Canadian equities amid a global bid for risk assets. Bond yields hardly budged, while crude oil fell 65 cents; a fairly small change when accounting for volatility. Today’s big event is the Bank of Canada’s interest rate decision. We’re a tad more dovish than consensus with our 50bp call, which we think is warranted considering that inflation pressures are more muted in Canada compared to the US, and financial stability risks pertaining to the housing market are growing rapidly. With money markets pricing a 75% chance of 75bps, the knee-jerk reaction in USDCAD will likely be a small move lower in the case of 75bps, or a more substantial move higher in the case of 50bps. That said, where things stand after the dust settles will rely heavily on Macklem’s comments at the press conference along with broader risk conditions in markets.


The broad dollar stole the show in FX markets yesterday as a string of back-to-back negative economic data points prompted a repricing in global risk conditions as the Fed pivot narrative seeped back into focus. The trigger, this time around, was the release of US housing data for August. Both the S&P Case Shiller data and the FHFA house price index undershot expectations and declined for a second consecutive month, a feat that hasn’t been seen since early 2012. In terms of the Case Shiller data, which saw house prices in 20 US cities fall by 1.32% MoM in August, the decline in home prices is bordering on the decline seen in 2008, where prices fell on average between 1.4% and 2% MoM. The data, which compounded concerns from the weaker batch of flash PMIs for October on Monday, prompted speculation that the Fed will downshift to 50bps in December, as posited by WSJ’s Nick Timiraos on Friday, due to a substantial slowdown in growth conditions. The OIS contract for December’s meeting continues to sit roughly 10bps off of its post-CPI high, while pricing of the Fed’s terminal rate, which is expected in May of next year, fell 10bps yesterday alone. This ultimately weighed on Treasury yields, with the back-end of the curve exhibiting the largest repricing (10-year -14bps). The move in Treasuries buoyed risk sentiment, and with a large portion of cash still on the side lines, the market move into risk assets was aggressive yet again with the tech-heavy NASDAQ index climbing the most with a 2.25% rally on the day. This isn’t the first time we’ve seen this type of price action in the broad dollar. The release of the ISM manufacturing and job openings data at the beginning of the month had a similar one-two impact on market positioning, until hard data in the form of payrolls kicked everyone out of the risk-on party. The question now is what could reverse this week’s rally ahead of the Fed meeting next Wednesday. While not as instrumental for the Fed’s near-term hiking path as payrolls data, markets can expect Q3’s advance GDP data tomorrow, with the more influential PCE inflation report and inflation expectations data due out on Friday. Today, however, little top-tier data is released, meaning there is a window for an extension in the risk rally before it potentially meets more resistance.


Price action in the single currency was notably muted in the morning of yesterday’s session, highlighting the range-bound nature of the euro under current economic conditions. It took a repricing of the global risk backdrop for the euro to break its earlier ranges, as after the US housing data the single currency rallied close to a percentage point to trade just shy of the parity threshold. The question now for the single currency is if the ECB’s meeting on Thursday will disappoint expectations or will provide the euro with another bullish signal. In the event of the latter, a break above parity could prompt a sharp extension of the rally, but one that we ultimately don’t expect to last as we expect the Fed to continue to reaffirm its hawkish outlook on rates in the near-term.


Despite yesterday’s CBI data providing yet another clear recession signal for the UK economy, the pound outperformed in the G10 space; a theme that was fixed in place from yesterday morning. This was likely due to the appointment of Prime Minister Rishi Sunak, and the positive impact it will have on investor confidence given his emphasis on economic and political stability. Throughout the day, Sunak appointed Cabinet members. Familiar faces like former Brexit Minister Dominic Raab returned to the cabinet, with Raab himself appointed as Deputy PM, while Chancellor Hunt was one of the few reappointed to his current position. Although the reshuffle and vow for political stability provided sterling with a positive spread over other G10 currencies, it wasn’t until the release of US housing data that sterling really starting to move. The data prompted a dovish repricing of US rates and a positive re-adjustment to risk conditions, which stimulated the bulk of the pound’s 1.7% gains on the day. Today, with the pound hovering below levels not seen since mid-September, all eyes will be on the cross-asset space along with Sunak’s announcement on the timing of the Autumn budget. In its current form, the budget is set to be announced on Monday 31st October, however, with the OBR not set to deliver the full set of forecasts to the Chancellor until tomorrow, this leaves Sunak little time to make any adjustments to Hunt’s policies. It is rumoured that a delay of a few days may be announced, such that the PM has time to review the latest budget measures and the budget is still delivered before the Bank of England meeting on Thursday. There is a risk that the budget could be moved into November, however.



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