News & Analysis


The Canadian dollar fell to a fresh 28-month low yesterday, falling just over 1% against the greenback on broad-based risk-off sentiment and cross-asset volatility. The Federal Reserve’s surprising aggressiveness last week has been the underlying driver of recent CAD weakness: just five weeks ago, both countries’ 2Y yields were a single basis point apart; yesterday, the spread between them widened to 67bps. That weakness was amplified yesterday by the announcement of new incoherent UK fiscal policies that lack coordination with the Bank of England’s tightening cycle; speculative traders who drive much of the swings in currency markets thought to themselves, “that’s it, I’m holding dollars.” Developments in crude markets merely added fuel to the fire, as WTI fell nearly $2 to $76/bbl. Alongside this, the CVIX implied currency volatility index spiked dramatically higher to touch its highest levels since the peak of the Covid-19 crisis. Today’s data calendar is empty on the Canadian side, but high volatility in correlated markets is likely to keep the loonie on its toes.


Although the pound stole all the headlines in markets yesterday, higher treasury yields and realised volatility in the cross-asset space meant the dollar bid was much broader than news headlines suggested. Within broader markets, rising Treasury yields inflicted the most pain at a time when volatility was already testing investors’ resolve. The US 10Y yield rose a whopping 20bps on the day to sit just shy of 4%, its biggest one-day increase since March 2020.That drove a bear steepening in the treasury curve, as the 2Y rose by a respectable but comparatively subdued 14bps to 4.34%. The recent rise in US yields has been nothing shy of astounding: just two weeks ago, prior to the latest Fed decision, the 2Y was struggling to break 3.5%, and the 10Y was close to 3.25%. With so much going on in global markets such that traders and investors had little time to pause —UK fiscal shenanigans, speculation over an emergency BoE hike, the ECB’s discussion of quantitative tightening—the US dollar was one of the very few assets that appealed to investors. Equities, bonds, and commodities all sustained heavy losses; meanwhile, the broad dollar index, DXY, ended the day above 114, the strongest level for the index since May 2002. Today, the focus remains on the Treasury market and the impact it has on broader risk conditions given yesterday’s volatility and the copious amount of Fed speakers lined up for today. This will take place against a semblance of profit taking on USD longs this morning as yesterday’s move in Treasuries partially retraces. On the calendar for today is Chicago Fed President Evans speaking on CNBC at 08:30 BST, St Louis Fed President James Bullard speaking at 14:55 BST, and Minneapolis Fed President Neel Kashkari speaking at 18:00 BST.


Price action in the euro was primarily driven by the repercussions of the decline in sterling on the EURGBP cross, however, the widening in the German Bund – Italian BTP yield spread also played a role in dragging the single currency 0.73% lower on the day. The 24 basis point widening in the 10-year BTP-Bund spread was primarily driven by rising bond yields globally and commentary by ECB President Christine Lagarde on the central bank’s plans for quantitative tightening. In comparison, the Italian election results had little impact partly because the result was well-aligned with expectations and also because of Meloni’s to-be-seen moderation regarding the adhesion to the Atlantic Pact, Italy’s relationship with European integration, and their aim to respect fiscal rules. Today, amid a vastly improved risk environment, the euro is reversing a large portion of yesterday’s losses, but remains some way below the parity threshold that it once hugged. Today’s gains may be tentative, however, as the euro remains highly sensitive to how Treasury yields are performing. While for eurozone bond yields, the swathe of ECB speakers will likely be key.


After dropping to record lows in the early hours of yesterday morning, the pound partially recovered once UK markets opened and speculation over an emergency rate hike from the Bank of England built. By mid-morning, markets had already priced in at least 50bps of hikes from the BoE this week alone, signifying their expectations of an emergency announcement in the coming days, while 200bps by November were also in the price. Heightened expectations of the BoE’s hiking cycle propped up the pound heading into the New York open, while they also facilitated a strong bid in gilt yields along with an increase in expected near-term inflation. Heading into the afternoon, volatility in the pound started to subside as markets patiently awaited the response from the BoE, but it wasn’t until 4:30pm BST when they received it. Delivered in the form of a statement from Governor Bailey, the Bank of England announced that it wouldn’t be conducting an emergency inter-meeting rate hike, but they gave the market some concessions in the form of a “whatever it takes” style commitment when it came to November’s interest rate announcement. For FX markets, the Bank also took the rare steps in explicitly tying the level of the pound to its next rate decision in an effort to subside concerns over a currency crisis. While the Bank’s efforts have initially worked in stemming the bleed, we think they may come under pressure again should investors continue to show their negative investment outlook on the UK within the cross-asset space. Should this occur, the Bank’s piecemeal efforts to soothe investor fears will likely be disregarded, even with aggressive pricing in short-term interest rate markets for November’s meeting. While this morning there are no signs of this occurring in heading into the UK market open, with the pound trading a percentage point higher against the dollar as news of Chancellor Kwarteng meeting major Banks sits on the front page of financial news outlets, investor sentiment could soon shift should US Treasury markets ramp up pressure on risk sentiment yet again.



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