News & Analysis


The Canadian dollar took a slight hit yesterday, weakening two tenths of a percent as crude prices fell $2/bbl and US equities closed in the red. Outside of the cross-asset price action, there wasn’t much to note in yesterday’s CAD price action, with the pair’s daily range narrowing ahead of today’s pivotal US CPI report. In the event of a strong print, which send equities hurtling lower, we anticipate that USDCAD could rally 1.3% to May 2020 highs.


The dollar DXY index traded mildly higher in yesterday’s session after US PPI data showed the deviation in goods and services inflation as outlined by the ISM measures last week. Earlier gains were trimmed in the evening of the European session, however, as the release of the Fed’s September meeting minutes suggested financial stability considerations warranted a more fine-tuned approach to the tightening cycle going forward. Despite this initial dip, which was largely driven by the fall in the 10-year yield, the commitment by Fed officials to continue hiking in order to weigh on inflation meant that the dollar partially rebounded to close higher on the day. However, as is usually the case, the DXY index was heavily distorted by the large EURUSD contribution, which masked the dollar’s strength across the broad G10 board. Today, all eyes are on US CPI at 13:30 BST, with the memory of last month’s scorching 0.6% MoM core print leading market participants to position for another hot one. Should the monthly core inflation print reach the heights seen in last month’s report, the pain inflicted in the equity market is likely to drive the dollar to a fresh leg higher. Conversely, a softer core reading, specifically due to a cooling in core services inflation, will resurrect the Fed pivot narrative ahead of November’s meeting and will likely lead to markets favouring a 50bp hike as opposed to 73bps that is currently priced in.


Italian government bonds (BTPs) reopened their spread against the less risky German government debt yesterday as ECB reaffirmed their hawkish stance. Both the Dutch and Austrian Governing Council members Klaas Knot and Robert Holzmann pointed to a 75bps hike in November in their communications, while ECB President Christine Lagarde took lessons from the UK’s current fiasco and called for greater coordination in monetary and fiscal policy going forward. However, the widening in these yield differentials, which could threaten the ECB’s hiking cycle as it signifies market fragmentation and thus financial stability risks, didn’t weigh on the single currency. Cheap valuations likely played a significant role in keeping the euro stable around current lows. Today, the strength in the US CPI number will prove key for the single currency, although we see significant upside as limited by Europe’s eroding fundamentals.


The pound drifted broadly higher in yesterday’s session as traders retraced the sharp drop exhibited on Tuesday evening following Governor Bailey’s stark warning to pension funds. With an FT exclusive yesterday calming the bond vigilantes down heading into the UK bond market open, the pound started yesterday’s session on the front-foot, while the BoE’s latest bond auction, which saw the central bank buy everything on offer to the sum of £2.375bn, kept a lid on the back-end of the curve in the afternoon of yesterday’s session. With bond market volatility subsiding somewhat, there was less pressure on the pound to increase the volatility-adjusted returns for foreign investors looking at UK assets. Today, with the pivotal release of US CPI in the afternoon, which itself can cause havoc in global bond markets, the pound looks prime for a correction. The extent of sterling’s slump should US core CPI MoM print on the strong side depends on the BoE’s actions in the afternoon. Should it gobble up everything on offer again for just the second time since the emergency measures were put into place, stabilising concerns at the back-end of the gilt curve, the pound’s losses may fall further in line with the broader G10 currency board.

FX Elsewhere

Intervention methods to induce two-way risk in FX markets by Asian central banks have generally proven effective over the past weeks. Not only has currency depreciation halted in these markets (JPY, CNY, KRW), but volatility has also significantly fallen despite the high levels of volatility in US Treasury markets and the broad dollar. However, after sitting in the shadows for the first weeks of October, some attention is shifting away from European FX markets and the impact of core bond market volatility back to the Japanese yen as it continues to plumb fresh multi-decade lows, beyond levels that prompted BoJ intervention back in September, as Governor Kuroda’s comments at the IIF reiterated the Bank of Japan’s commitment to keeping ultra-loose policy. This may come at a cost for Japanese officials, especially if US inflation ramps up the back-end of the Treasury curve this afternoon. With stealth intervention methods in full swing, markets will be keeping a close eye on if a spike in USDJPY sparks any lingering sell orders put in the market by the Bank of Japan.



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