News & Analysis


In line with the broad G10 move, the Canadian dollar rallied against the greenback following October’s CPI report. The loonie notched gains in excess of 2% to climb to a fresh 2-month high, aided by hawkish comments from BoC Governor Tiff Macklem on Thursday afternoon. Speaking at a press conference in Toronto, Macklem told reporters that “interest rates do have further to go” and that it could mean  “another bigger-than-normal step” in December. Wednesday’s release of October’s CPI report, the last inflation reading before December’s meeting, will therefore be influential for BoC rate expectations which currently price in a roughly 40% chance of a second 50bp hike. Prior to the inflation release, downside in the loonie is likely as Fed officials push back on the recent risk rally and still weak Chinese data for October keeps oil capped below $90 per barrel.


After falling 3.65% to lows last seen in mid-August in the 36 hours following October’s CPI report, the dollar is stabilising this morning as Fed commentary over the weekend looked to cool market expectations of an immediate pivot in US monetary policy. The most impactful comments came from high ranking FOMC official Christopher Waller who stressed that Thursday’s inflation report was one data point and that the market shouldn’t get ahead of itself when speaking overnight at a UBS conference in Sydney. Waller’s commentary follows that from San Francisco Fed President Mary Daly in the Financial Times over the weekend, which reaffirmed the Chair Powell’s comments on November 2nd that markets should focus on the level of rates as opposed to the speed in which they are now increased, suggesting a downshift to 50bps in December isn’t indicative of the Fed’s fight against inflation ending. With Fed officials looking to push back on the easing in financial conditions caused by the weaker dollar and equity market rally in response to the latest CPI report and the repricing in financial markets proving to be historically aggressive, the dollar is likely to retrace in the near-term until more data supports a secular decline. On the roster for today is further Fed commentary, with Vice Chair Brainard’s comments at 16:30 BST the pick of the bunch.


The single currency’s surge back above parity last week was extended by the risk-on rally post US CPI. With expectations of the Fed’s hiking cycle moderating as core inflation pressures ease, and still hawkish rhetoric from ECB officials, the narrowing in interest rate differentials between the US and the eurozone is helping the euro to consolidate at levels last seen in mid-August. Although the data calendar is fairly light for the eurozone this week, it is full with ECB speakers. Today, Governing Council members Panetta, Centeno and de Guindos are set to take centre stage, with commentary about the ECB’s next steps and market pricing likely following de Guindos’ comments last week that markets have overreacted to the miss in US inflation data.


The pound’s increased sensitivity to investor risk sentiment saw it outperform towards the back-end of last week despite data confirming the bleak UK economic outlook. Given the magnitude of the GBP rally, even in relation to the euro which also led gains amongst the G10, the pound remains vulnerable to a large retracement in the early parts of this week as the cross-asset risk rally fades. Comments by UK Chancellor Jeremy Hunt over the weekend regarding a universal increase in taxes to fill a widening fiscal deficit are likely assisting the retracement in the pound this morning too as they underscore the precarious position the UK economy finds itself in. Ahead of Thursday’s Autumn budget, markets will receive an update on the current state of the UK economy as labour market data for September is released tomorrow morning and inflation data for October is released Wednesday morning. Additionally, BoE Governor Andrew Bailey is set to testify to the Parliament Treasury Committee on Wednesday afternoon with fellow MPC members Broadbent, Mann and Dhingra.



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