Higher Treasury yields, a decline in equity indices, and downwards pressure on oil benchmarks sent USDCAD even higher yesterday to levels last seen in July 2020. With little on the data calendar to come to the loonie’s rescue, widening yield differentials and pressure on North American equity benchmarks will likely keep upward momentum unimpaired in the short-term.
Intervention by Japanese officials in the USDJPY pair yesterday put a temporary top in the dollar DXY index. But despite dynamics in the DXY index, where JPY holds the second largest share, the intervention efforts did little to stop the broader-based USD rally. Today, Volatility is likely to reduce further as markets have largely digested the latest Federal Reserve decision and the central bank calendar thins out. The focus instead will rest on Powell’s opening remarks at a Fed listens event at 19:00 BST and the release of preliminary PMIs for September across Europe and the US.
Although the single currency closed out yesterday’s session flat, intraday volatility remained high as it traded in a 1% intraday range. An escalation in the Ukraine war, coupled with higher US Treasury yields, continues to keep sentiment on the euro suppressed. This has hampered the euro this morning as it fell to fresh 20-year lows at 08:00 BST. Weak investor sentiment is unlikely to be reversed with the release of France and Germany’s preliminary PMIs for September this morning. Across all metrics, economists expect economic activity to fall further into contractionary territory. The biggest mover in Europe yesterday was the Swiss franc, which fell a percent against the euro after the Swiss National Bank undershot market expectations and met the consensus among economists with a 75bps hike. Despite the retracement in EURCHF, we expect deteriorating conditions in Europe and the SNB’s preference for a stronger franc to keep the downtrend in the pair intact.
The pound continued to hover around multi-decade lows against the dollar yesterday as the latest decision by the Bank of England to hike by 50bps underwhelmed markets, despite their communications being littered with hawkish connotations that point towards a 75bps hike in November and potentially even December. Focus today will be on Chancellor Kwarteng this morning as he is set to announce a “mini-budget” at 09:30 BST. Early indications suggest the budget will be littered with big spending pledges, ranging from the pre-announced household energy support measures to potential stamp duty and income tax cuts. Investors will be paying close attention for any signs of fiscal consolidation, whether it be via revenue-generating policies or offsetting spending cuts. Without such measures, current account concerns are likely to arise yet again, placing further pressure on the pound as it continues to carve fresh lows this morning.