News & Analysis


Rate differentials continued to extend in favour of the US dollar in yesterday’s session, with the 2-year Treasury yield climbing to fresh highs of 3.871%, 5 basis points higher than the Canadian equivalent. The increase in front-end Treasury yields weighed on both equities and WTI benchmarks, and with little in terms of domestic economic data, there remained few supportive reasons to hold the loonie. Ultimately, this cocktail of cross-asset price action sent USDCAD 0.46% higher, a move that is being extended this morning and that sees the pair break out of its 22-month range to the upside.


The dollar is going mildly bid this morning, edging closer to last week’s highs as global equity futures strike a unanimously risk-off tone and yields continue to climb. All of G10 FX is down against the dollar today, with NOK leading the losses and antipodes close to flat. The US treasury curve has continued to invert; relative to a week ago, the entire yield curve has shifted higher with gains concentrated at the 1Y and 2Y tenors, which are both up 35bps from last Friday. Should this trend continue, we could see the treasury curve invert more deeply than it did in the early 1980s. Sovereign yields also reflect tight borrowing conditions on an inflation-adjusted basis, as 5Y real yields pushed 11 bps higher yesterday to reach a new cycle high. The market moves are supported by yesterday’s US economic data, which largely pointed to weaker growth over the third quarter of 2022 with retail sales revised down, trade prices looking soft, and industrial production contracting. As we’ve argued previously, yesterday’s releases are unlikely to alter the outcome of next Wednesday’s Federal Reserve decision, but the weaker that output gets, the tougher it’ll be for the Fed to maintain tight monetary policy. The silver lining is that weaker import prices add to the weakness in producer prices we witnessed earlier in the week and should begin to pass through to softer consumer prices in the months to come. On today’s agenda we have the University of Michigan’s preliminary survey results for September, which economists expect to be unanimously positive. Sentiment, current conditions, and expectations for future conditions are expected to improve from last month, while 1-year inflation expectations are expected to decline two-tenths to 4.6%.


The single currency continued to hug the parity threshold yesterday in a session that lacked any substantial drivers. The main focus amid this lighter environment were comments by ECB officials De Guindos and Centeno, both of which sit on the dovish side of the spectrum. Despite their usual affinity with a more cautious approach, both toed the line with the hawkish party line that President Lagarde presented at the September meeting. With even the doves among the Governing Council calling for “determined action” to lean against the de-anchoring of inflation expectations, market pricing of the ECB remained firm. With little perceived upside in the ECB’s near-term pricing, however, the single currency remains exposed to movements in the Fed’s implied rate path, making next week’s decision and dot plot projection key for EURUSD. In more immediate focus today will be President Lagarde’s comments alongside Bank of France Governor Francois Villeroy de Galhau at an event in Paris at 09:30 BST, before the final eurozone CPI reading for August at 10:00 BST, which is expected to remain unchanged from the flash reading of 9.1% YoY.


Following Tuesday’s outperformance, the pound sank to the bottom of the G10 pile yesterday as it retraced its rally the day prior and then some. This morning, sterling’s downward momentum continues with an excessively sharp decline occurring at 7am BST following the release of August’s retail sales. Although the contraction in volumes sold comes as no surprise, given the well-telegraphed cost of living crisis, suppressed level of consumer confidence, and elevated level of sales in July following Prime Day, the 1.6% MoM contraction was more than double the expected decline. The contraction in consumption was primarily driven by the 1.9% drop in non-food store sales as consumers tightened their belts, while food store sales also fell 0.8% on the back of higher prices. The latest consumer data highlights that businesses will struggle to pass on higher prices to consumers given the weakening demand outlook. The threat of which was the main reason for the BoE’s 50bp hike back in August. Given the latest consumer data, we continue to look for a 50bp hike at next week’s meeting, a result that could be net negative for the pound should the currency remain sensitive to money market pricing.


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