News & Analysis


Similarly to the broad US dollar, the Canadian dollar continued to trade around recent levels, albeit with a wide intraday range. The loonie managed to eke out a tiny gain against the greenback, making it one of the stronger performers in the G10. Risk sentiment was mixed, while gains in Canadian bond yields started to catch up a bit to US yields, allowing the loonie to eke out a tiny gain against the greenback. That was supported by a $2 rise in crude prices, which came off the back of news that Russia could restrict the supply of oil it gets to market.


The US dollar continued to trade near Monday’s highs as hawkish Fed commentary helped the currency rally up support. The intraday range in the dollar DXY index was fairly wide, as an early morning relief rally in risky assets on the back of lower Treasury yields sent the index below 113.5 briefly before it reversed in the afternoon to close at 114.16. Over the course of the day, the yield curve grew slightly less inverted, as front end yields fell a few basis points while back end yields rose. Conference Board data for September showed US consumer confidence beat expectations, rising to 108 from 103 the month prior. Nevertheless, the improvement in confidence likely reflects easing gasoline prices, and may prove short-lived as US equities have fallen to their lowest levels in two years. In terms of Fedspeak, Minneapolis Fed President Neel Kashkari backed the current pace of interest rate hikes, while Philadelphia’s Harker suggested further housing supply is needed to ease shelter inflation. This morning, despite the slight moderation in 2-year yields and their reluctance to hold above 4.3%, the dollar’s ascendency continues. Whether it is rising geopolitical risk in Europe due to sabotage on the Nord Stream pipelines or the further collapse in the Chinese yuan, it is difficult to look past the greenback in this current environment. Should US yields ramp up again in the US session, sending stock benchmarks lower, we expect the dollar DXY index break above 115 for the first time since Q2 2002. In terms of data today, the main calendar event will be this week’s latest MBA mortgage applications report, which is set for release at 12:00 BST / 07:00 ET.


Trouble is brewing in the eurozone, sending the single currency further underwater. News of Nord Stream pipelines being sabotaged has not only hampered sentiment around European assets due to the potential ramifications it can have on geopolitical tensions, but has also drawn a line under the debate of whether the euro area will receive any Russian gas flows this winter, despite them currently being turned off. In response to the developments in the Baltic, gas prices have ratcheted up over 19% from yesterday’s open, thrusting the eurozone’s current account deficit back into the limelight for EUR traders. The euro trades 0.45% lower this morning in response, carving fresh 20-year lows in doing so.


We noted in yesterday’s report that the recovery in the pound was highly tentative and that it was overinflated by the positive risk environment in broader markets based off of a decline in US Treasury yields. This view was confirmed in the evening of yesterday’s European session as the 2-year Treasury yield tracked back above 4.3% while the 10-year came close to breaking 4%. The move in US yields pushed equity benchmarks lower and placed pressure on the broader risk environment, sending sterling to lows on the day. While the pound ultimately recovered as front-end Treasuries struggled to hold their highs of the day, the move late on in the European session highlights how investor sentiment remains precarious around UK assets. Domestically, hawkish commentary from BoE Chief Economist Huw Pill failed to assuage fears around further GBP downside, with the rally in gilt yields uncorrelated with the pound’s price action. Pill’s comments that the significant reaction in financial markets to the budget announcement required a significant response from the BoE confirmed hawkish market pricing of the BoE’s hiking profile; overnight index swaps now project a peak in Bank Rate just shy of 6.3% by June 2023. This saw 30-year gilt yields break 5% for the first time since 2002 and the recovery in earlier dated yields reverse. 2-year yields now sit above 4.5%, with the 10-year trading just 0.2bps from that threshold. Even amid this high interest rate environment, FX traders remain unconvinced as the pound continues to drop today with a 0.6% decline registered overnight as the IMF urged the government to re-evaluate its unfunded tax cuts, suggesting November’s full budget provides the opportunity to re-assess. In addition to this, major credit ratings agency Moody’s has downgraded the UK’s credit outlook to negative, an assessment of the UK’s fiscal profile that is shared in the long-date gilt market. Today, with little released in terms of UK data, the cross-asset risk backdrop will take the driving seat yet again for sterling, with much focus on whether the US 2-year will break and hold above 4.3%. Later this evening at 19:00 BST, newly appointed external BoE member Swati Dingra is also set to speak. With Dingra the only MPC member who voted in favour of a 25bp hike last week, the shift in her stance on the Bank’s rate path will be telling.



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