News & Analysis

CAD

The loonie rallied by 0.9% on Wednesday on the brief return of risk appetite following UK developments and a rally in crude. We don’t put too much stock into technical patterns, but for those who do, USDCAD formed a “hanging man” candlestick pattern. Technical analysts would interpret the pattern as a signal that loonie bulls have taken the reins, implying further downside for USDCAD over the very near term. The limitations of technical analysis are on show this morning, however, as the USDCAD pair retraces back to yesterday’s opening price on the rebound in front-end Treasury yields and the impact it is having on equity futures. The only fundamental factor supporting the move is the oil rally, which came off the back of the surprise news that EIA crude inventories had declined by 215,000 barrels, however, even that is sensitive to the pressure of US rates. The global outlook isn’t positive enough to support a durable improvement in investor risk appetite, and the Fed is now set to well-outpace the Bank of Canada in the race to raise interest rates.

In other news, the Bank of Canada has announced that it will begin publishing high-level summaries of its policy deliberations come January, following a transparency review by the IMF. The summaries will be released after each decision with a two week lag. We think this is a great move by the Bank of Canada, albeit one that was well overdue. Greater transparency from the central bank will only help market watchers and the Canadian public more broadly, as we will gain a better understanding of its goals and reaction function. Today, we’ll be getting Canada’s payroll employment survey (SEPH), and GDP for July at 13:30 BST / 08:30. Given that all of these releases are scheduled at the same time as important US data, we expect that US developments will dominate today’s reaction in USDCAD.

USD

Once again, the UK was in focus for FX markets yesterday, with those developments leading the broader dynamics in G10 FX, including USD. Following the decision by the BoE to be the buyer of last resort for gilts, the huge decrease in UK yields turned into a sympathy move in government bond markets across the globe. Looking at fixed income, US 2Y yields fell 17bps, 10Y yields fell 21bps, and money markets lowered their expectations for the rate at which the Federal Reserve will stop hiking to 4.4%, which got as high as 4.8% on Monday. The reduction in pricing for Fed expectations, combined with a broad resurgence in global risk appetite, both weighed on the broad dollar DXY index, which erased more than two days of gains in its 1.2% plunge. While several Federal Reserve officials, including Chair Powell and Presidents Bullard, Bostic, and Evans all spoke at various events on Wednesday, the speeches were relatively uneventful. Powell declined to comment on policy, while Bullard, Bostic, and Evans chose to reinforce the message from last week’s ultra-hawkish interest rate decision. Today, we’ll receive the third estimate for Q2 GDP, as well as initial jobless claims data for last week at 13:30 BST / 08:30 ET.

EUR

Following the Bank of England announcement and heading into the US open, the euro began to recover as yields across the board facilitated a better supported risk environment. From its mid-day lows, the single currency rallied over 2% before closing the day out 1.47% higher. Similar to the pound, the euro rally was on shaky grounds and is already starting to be reversed this morning a 2-year Treasury yields rise back towards 4.2%. Today, inflation data also repeats the harrowing message that is the eurozone’s economic fundamentals. Earlier this morning, Germany’s most populated region, North Rhine Westphalia, released its inflation data for September which saw price growth jump from 8.1% to 10.1% YoY after the expiry on the rail discount saw prices jump 1.8% alone. This poses substantial risks to the national reading at 13:00 BST, where inflation is only expected to rise 1.6 percentage points to 9.5%. Offsetting some the ECB’s inflation concerns is data out of Spain, which saw inflation substantially undershoot expectations and August’s print with a reading of 9%. However, this has done little to turn around the rise in core eurozone yields this morning and the initial 0.7% decline in the euro. Beyond inflation data, euro-crosses will come into focus today as the National Bank of Hungary announces its latest policy decision, while the meeting minutes from the Riksbank’s 100bp move last week are published.

GBP

The Bank of England launched a £65bn emergency programme yesterday as it tried to soothe concerns of a liquidity crunch in long-term bond markets on news that recent market volatility was set to trigger margin calls for liability-driven investors such as pension funds. While the intervention didn’t have nearly as many offers accepted as the £5bn allotment and announcement of an emergency measure suggested, it helped restore some functionality in bond markets at the back-end of the curve, which filtered through to reduce some risk premium at the front-end. The announcement caused markets to whipsaw, with the pound initially rallying on the headlines before falling close to 2% on the day against the dollar. Later into the European session, however, the BoE’s efforts in the gilt market migrated out to other core bond markets, sending yields slight lower across the board. The decline in US Treasuries was the most notable development in markets as it partially opened the valve of the pressure chamber for markets, facilitating a more sustainable rally in the pound along with North American equities. However, any initial rally in sterling is currently being patched over by the lower yield environment, which is subject to changing on a dime, like it has done this morning to send the pound close to a percentage point lower overnight.

Although the step by the BoE to delay its quantitative tightening programme and backstop liquidity conditions in longer-dated gilt markets is a positive development, the time-limited nature of it and the narrow focused efforts by the central bank is unlikely to assuage investor concerns. Therefore, we still look for an inter-meeting rate hike in the region of 100-150bps in the absence of a government U-turn in order to remove our tactically bearish GBP view.

 

 

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