News & Analysis


In yesterday’s trading session, news and data were sparse, while USDCAD continued to grind slightly higher as the dollar gained against all other G10s. The main piece of data for Canada was the Bank of Canada’s Senior Loan Officer survey, which showed a sharp swing in the balance of opinion from Q1. While the first quarter’s survey pointed to considerable tightening in financial conditions, the latest edition suggested that conditions remained relatively unchanged throughout the second quarter. Markets shrugged, as the swing mostly reflects the Bank of Canada’s pause that ended in June, shortly before the survey was conducted. There wasn’t much time between the decision and the survey, and it would not have incorporated the most recent 25bp hike, either. Much more importantly for markets will be today’s CPI report for Canada, where traders are keen to see whether core inflation has finally turned a corner after months and months of persistence. Economists expect a slight uptick in headline inflation to 3.0%, but see CPI-median and CPI-trim edging down to 3.7% and 3.6%, respectively. We are hopeful to see a turnaround, but the risks to core inflation skew to the upside, which would translate to further near term USDCAD strength if materialised. Manufacturing sales will be released at the same time, but likely won’t have much of an impact on the overall market reaction as CPI takes greater precedence.


Price action through yesterday’s session was largely dominated by a narrative of US exceptionalism once again, with the dollar leading moves across FX markets. Whilst not a new story for markets, signs that the US economy continues to hold up while growth appears to be slowing sharply in both China and the EU has provided a tailwind for the greenback in recent weeks. It was no surprise then that yesterday’s move was triggered in large part by yet more signs of growing weakness in the Chinese economy, with long-standing property woes appearing further inflamed after several new pieces of bad news. One Chinese property developer suspended trading in its bonds, while another reported an 80% drop in profits, and a large wealth manager with a stake in the real estate sector failed to make a payout. This stream of bad news saw the DXY dollar index finish the session up 0.3pp, albeit someway off the intraday highs. But reaction to this ongoing tale of economic woe has not just been limited to FX markets. Overnight the PBOC announced a surprise cut to the 1-year medium term lending facility, cutting rates from 2.65% to 2.5%. Whilst the reaction of the broad dollar has been limited so far today, the move has notably led further strengthening in USDCNY which is up almost half a percent already this morning.


Whilst news out of the eurozone was limited yesterday, price action for the euro was surprisingly not. EURUSD fell by 0.4pp over the course of the day as weak Chinese data and a US exceptionalism story saw the dollar favoured by markets. Today looks set to be somewhat quieter for the euro however, with much of the continent celebrating a public holiday, despite further developments in China overnight.

In Sweden though, CPI out this morning was still worthy of note. On the whole, today’s data came in marginally weaker than expected, but with headline price growth unchanged from last month at 9.3% YoY, the release serves to illustrate once again just how much of an outlier Sweden increasingly appears. With the Riksbank having to balance policy tightening against risks to growth and financial stability, the room for policy manoeuvre is limited, with few good options available. In recognition of this, price action this morning has seen EURSEK retrace most of yesterday’s 0.7pp decline with the Swedish currency once again trending towards all time highs. The one piece of good news for the Riksbank though is that this is not the last piece of data before the next policy meeting. With inflation set to cool in coming months and the ECB at the end of policy tightening, a break in the clouds could be on the horizon for both the Riksbank and the krona. But for now, the outlook continues to look grim.


UK labour market data proved something of a mixed bag for markets this morning. On the one hand wage data proved far stronger than expected, with average weekly earnings growing by 8.2% on a 3m/YoY basis. In contrast, the unemployment rate also surprised to the upside, printing at 4.2% to leave it virtually in line with BoE estimates of the equilibrium rate. Taken together this paints a picture where labour market slack continues to build, but one where this has not yet translated into weaker wage growth, and in turn softening inflationary pressures. In our view this should still play out over coming months, with sufficient time for the hard data to reflect this before the BoE’s November policy meeting. Therefore we retain our call for a final rate hike in September. But risks to this view are tilted to the upside, and even more so following today’s data. Given this, expectations for the peak in Bank Rate have naturally moved higher this morning, with markets now pricing a peak of close to 6%. Whilst we continue to think the BoE will fail to deliver on that level, it did drag the pound higher to start the day, before sterling gave up much of those gains as markets continued to digest this morning’s release.

FX Elsewhere

Wage data from Australia overnight did little to move market expectations on RBA policy tightening. Coming in just a touch below consensus, however, this is unsurprising. With wages growing at 3.6% YoY the RBA is not quite at a level where it will have full confidence that they are done with hiking interest rates. But nor is the need for any further policy tightening imminent. Given this, reaction in AUDUSD was limited, with markets waiting for more conclusive evidence before taking the pair on its next leg.

Antipodean action is not just limited to Australia, however, with a policy decision from the RBNZ also due early tomorrow morning. Given the RBNZ has already declared a pause in policy tightening, anything other than a hold would be a major surprise to markets, with price action in NZDUSD naturally limited as a consequence.



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