News & Analysis


The idea that the USDCAD rally got taken too far throughout the month of August is picking up steam, with the loonie gaining against the dollar for a third consecutive day yesterday. The Canadian currency rose by 0.2% against its American counterpart, one of the better performances in the G10. With yields and equities virtually unchanged, a 2.3% rally in oil was one of the key cross-asset developments that helped the loonie keep clawing back its losses. The oil move, in turn, was brought on by news that Russia has agreed to further OPEC+ production cuts, although the details will be released next week. In terms of the data, Canada’s current account deficit widened slightly to -$6.6bn, although economists had anticipated a far greater deterioration. The SEPH payrolls survey, meanwhile, confirmed that job growth in Canada is slowing, with a 47.7k print for June coming down from 129.9k the month before. Today is the day that loonie traders have been waiting for, though. GDP figures for Q2 will be the final test of our thesis for the Bank of Canada decision next week, being the last piece of key data ahead of the meeting. The consensus expects a print of 1.2% QoQ annualised, which would undershoot the Bank of Canada’s 1.5% forecast. In our view, the bar is high for this report to scare the Bank into hiking next week. For one, growth signals spanning the manufacturing sector, retail sales, external trade, and the labour market, are all pointing to a slowdown. And second, even if we’re wildly wrong and GDP overshoots the consensus, there is still ample room for the print to come in below the Bank of Canada’s 2.3% estimate of potential GDP, which would indicate that core inflation pressures are set to subside. Markets are not particularly worried, pricing less than a 15% chance of a hike next week.


After sustaining broad losses for two consecutive sessions on the back of data that befit the US soft landing narrative, the dollar rebounded yesterday as data for the beginning of the third quarter once again highlighted the strength of the US consumer. July’s PCE report showed real personal spending rose by 0.6% MoM, 0.1 percentage points above expectations, with the composition showing spending growth generally favoured goods over services. While the Fed will be happy to hear the latter development as it suggests minimal risks to the disinflation progress of their supercore measures of inflation, the overall strength in the US consumer remains an area of support for US assets. It is this view that markets took, with the US Treasury curve once again bull steepening yesterday, but unlike previous sessions this didn’t translate into broad dollar weakness. US equity outperformance likely played a role in supporting the dollar, but on a more general basis yesterday’s price action highlights the barriers to becoming bearish on the dollar on the back of cooling Fed expectations.

This morning, European traders enter the fray to a continuation in the mild dollar bid, with Antipodean currencies once again leading losses in early trading. This occurs despite data overnight showing house price growth in Australia accelerating in August, loans for new construction falling in July, and China’s Caixin manufacturing PMI printing in expansionary territory. Potentially explaining the sell-off in APAC currencies is the decision by the PBoC to cut Bank’s FX reserve requirement from 6% to 4%, a move that was aimed to support the onshore yuan. However, throughout the overnight session, the initial 0.26% drop in USDCNY at the open has been reversed by traders, once again highlighting a reluctance to fade last month’s rally in the pair on remaining growth concerns. These ongoing growth concerns, even in the face of improving PMI data and continued support measures by Chinese officials, partially explain the ongoing underperformance of AUD and NZD in early trading, with both currencies closing tracking the subsequent retracement in the yuan this morning. Later today, the marquee event for markets this week takes place as US nonfarm payrolls data for August is released. Early indicators suggest that payroll growth should moderate yet again, in line with expectations, but to a rate that is still above the pace of growth required for concerns over inflation persistence to moderate. Given the focus remains squarely on the labour market’s impact on inflation conditions and the resilience of the US consumer, average hourly earnings will also be in scope. Here, expectations are for a modest slowdown from 0.4% to 0.3% MoM. Should the data meet expectations, we don’t expect the release to rock the boat in markets, however, risks are finely balanced and the devil may be in the detail.


Yesterday’s market action was a funny one for euro traders. On the one hand, core inflation matched expectations, and headline readings overshot, with both printing at 5.3% YoY. In isolation this should have seen expectations for the ECB’s September meeting hold steady at 50% if not climb. Yet the market implied probability for a September rate hike got crushed, with swap markets now favouring a hold at the next policy meeting. Two key reasons stand out for this. First, commentary by Isabel Schnabel yesterday took a decisively more neutral tone relative to earlier in the year, with the ECB’s market specialist balancing the risks of more persistent inflation against signs of a stagnation in growth. This reminded markets that should the ECB hike once again, it will likely do so into a self-induced recession. Second, while core CPI met expectations, the strength was largely due to core goods inflation as core services inflation exhibited unexpected weakness. While the data reinforces that September’s decision is a close call, we continue to believe a last 25bp hike is the likeliest option and expect this to be confirmed by next week’s eurozone wage data. Nevertheless, given the stagflationary environment, the reduction in the near-term policy expectations should have been a positive for the euro, seeing as the uptick in previous sessions was seen as a drag on the single currency. However, this wasn’t necessarily the case as the odds of a hike remained a coinflip across the next two meetings, while headlines over the stagflationary outlook in the eurozone contrasted with strong growth data in the US. Ultimately, the single currency decline 0.73% on the day to close out the month just shy of our 1.09 one-month forecast back in August. Today, the risk event for euro traders comes in the form of US payrolls. With the single currency still highly sensitive to US front-end rate developments, any strength in the jobs data will likely sink the euro further, while subsequently signs of weakness could see yesterday’s decline reversed.


For UK watchers the most notable news out of Thursday’s session came in comments from Bank of England Chief Economist Huw Pill. Speaking in South Africa, he suggested that he favoured a “Table Mountain” profile for monetary policy, in contrast to market expectations that imply a higher but shorter lived peak in Bank Rate. In doing so, Pill confirmed our long held belief that many at the Bank would prefer to undershoot market expectations for peak Bank Rate, and instead pursue a high for longer strategy. Whilst we continue to see the BoE hiking this month, given the continued strength in wage data, Pill’s comments reinforce our view that this will be the final hike of the tightening cycle. For now, markets continue to look for two further hikes from the BoE, though yesterday’s price action saw the possibility of a third largely priced out. This saw the pound fall on the day, down four tenths against the dollar, though up by the same margin against the euro. This morning, traders are likely to continue parsing Pill’s statements, but will also have another round of Nationwide house price data to keep them busy. This latest release showed house prices fell by 0.8% in August, contributing to a 5.3% contraction YoY. Whilst this was worse than expected, and will weigh on sentiment, it is unlikely to change many minds on Threadneedle street.



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