Falling US yields, rallying oil benchmarks, and stronger equity indices have all amalgamated to send the loonie 2.36% higher relative to Friday’s lows. However, as the mood in markets begins to shift this morning, the question for CAD bulls as the loonie trades 0.2% lower this morning will be how supportive is the production cut decision by OPEC+ going to be. Over the past few days, reports of the output cut have become more bullish, with the consensus now sitting at around 2m barrels per day. In our view, with WTI trading at $86 per barrel, up over $10 from last week’s lows, the risks are skewed towards oil benchmarks becoming a headwind for the Canadian dollar rally yet again.
Short covering, position squaring, bear market rally, whatever you want to call it, is what is driving the retracement in US bond markets, and by extension global bond markets, and therefore cross-asset price action thus far this week. Within this macroeconomic backdrop of lower global bond yields, rallying equity markets, and better-supported risk conditions, the dollar traded lower across the board in a second consecutive session yesterday with some G10 currencies, like GBP and SEK, notching gains of over a percent. These cross-asset dynamics are what’s masking a lot of the shaky fundamentals that these “rebounding” currencies are underpinned by and price action this year tells us that this sharp retracement in underperforming assets year-to-date has proven only to be temporary. We saw it towards the back-end of May when the 2-year fell back to 2.5% before it climbed over 100bps in the following fortnight to send equities crashing to fresh lows, we saw it at the end of July and in August as the 2-year fluctuated in the region of 3-3.5%, buoying equities before the Fed put an end to it in September, and arguably we’re seeing it again, albeit it at lower levels on the S&P 500 and higher levels on the 2-year (north of 4%). The question on everyone’s lips is what then crashes the risk-on party this time? We think it is the more informative data over the remainder of the week. While weaker ISM manufacturing data and a decline in August’s JOLTS job openings played into the narrative of a slowing US economy, where wage growth will start to drop off and the Fed won’t need to be as concerned over inflation, the soft survey data has had a poor track record in predicting the harder data so far this year. By comparison, the hard data due out over the coming days–today’s ADP employment change data at 13:15 BST, tomorrow’s initial jobless claims data for the week ending October 1st, and most importantly Friday’s Nonfarm payrolls data for September–will have a greater informational value for the Fed’s decision-making process and will likely show the US labour market remains incredibly tight and continues to produce intolerably high wage growth. Additionally, although it is also a soft survey measure, the ISM services PMI, which is also due out today at 15:00 BST, is arguably a better measure of the US economy than the export-orientated manufacturing measure that was released on Monday, especially as core services inflation is where the Fed’s current problem lays. Should the services measure refute the message from the manufacturing survey in combination with strong labour market measures, the Fed pivot trade that has been driving markets the past few days will likely be over as quickly as it started.
After the single currency showed limited movement on Monday to the slip in the US ISM data, yesterday it was all about playing catch-up for EURUSD. While deteriorating economic fundamentals have meant that the euro continues to trade below parity, yesterday’s 1.6% rally saw the currency pair trade right up to the psychological threshold; something that hasn’t been seen since mid-September. While we don’t expect further appreciation in the euro to persist, especially as the eurozone economy slips into recession over the winter months, we can’t rule out a temporary breach in the parity level short the short squeeze in markets continue. Today, similar to the UK, the data calendar is mainly populated by final services and composite PMIs for September. More focus is likely going to be placed on developments in Vienna, where OPEC+ are mulling the magnitude of its production cut. Further upside in oil benchmarks will only place further pressure on the euro area’s energy outlook.
Ignore the pound, it’s drunk. On what you may ask? The market’s risk-on hysteria. As outlined in the USD section, a shift in positioning in US asset markets has papered over the cracks for some currencies, especially the pound, in the past few days. With US data likely to end the conversation over a Fed pivot in the coming days, the pound scans as the currency within the G10 that is prime for an aggressive retracement, especially as risk premiums have dropped considerably in UK assets over the past week. With very little in the data calendar set to be released today beyond the final reading of September’s services and composite PMIs, the focus will be heavily on the US data and the impact it will have on cross-asset pricing. Outside of this, headline risk remains plentiful as the Tory party infighting continues in Birmingham. While yesterday saw the back-and-forth in rumours over the timing of the government’s, today will rest on Prime Minister Truss who is set to address the conference in a 30-minute speech which outlines her continued commitment to cut taxes in order to end the “high-tax, low-growth cycle”.