News & Analysis


Markets were awfully quiet on Monday, partially because the UK—which accounts for a third of daily FX trading volumes—was on holiday, but also because of a total data drought. The loonie traded in an extremely tight range against the dollar, moving sideways for most of the day. In Canada, much of the news coverage is coming from the political arena, as the polling data has swung sharply in favour of the opposition Conservatives. Poll aggregator 338Canada’s model suggests that if an election were held today, the Tories would have a 98% chance of winning the most seats; a month ago, the Liberal and Conservative parties were neck and neck. While the polls have pundits talking non-stop about Prime Minister Trudeau’s political future, the Liberal government’s supply and confidence agreement with the NDP should keep the party in power until 2025, meaning that election risk is still off the radar for markets. Back to markets, though, today should see a pick-up in volatility with London traders back at their desks and a raft of medium-impact US data releases on deck. For Canada, however, the data calendar is completely empty until Thursday and Friday, with the latter’s GDP report being most crucial for markets.


The market discourse last week was dominated by the potential upwards revision of the Fed’s so-called neutral rate of interest (r*), which would feed into the official narrative of higher rates for longer, and the PBoC’s efforts to stabilise the yuan below the 7.30 handle as investors fretted over growth conditions once again. The combination of the two dynamics sent the dollar DXY index to levels last seen in early June, before the dollar came off its highs on Friday as Chair Powell was seen giving a more neutral speech at the Fed’s Jackson Hole symposium and avoided any discussion around an upwards reassessment of the r* level.

Chinese growth conditions and US rates are set to be the focal points for traders once again this week with August’s jobs data and ISM manufacturing PMI report published out of the US on Friday and official PMIs due out of China on Thursday. Even before the data, headlines this morning are dominated once again by signs that analysts and investors are becoming more bearish on Chinese growth, with Bloomberg’s latest poll showing a 0.1pp downgrade to the median growth projection for this year to a rate of 5.1%, with some economists now anticipating sub-5% growth. Meanwhile, Reuters are reporting a surge amongst Chinese retail investors to invest in overseas markets, with the amount of mutual funds issued under the Qualified Domestic Institutional Investor programme already sitting at 38 for the year, up from 31 in 2022. Unlike last week where similar concerns weighed on the cross-asset risk environment and played into the dollar’s hands, global equities and futures trade in the green this morning while the dollar trades marginally lower against the bulk of the majors. This is primarily due to the efforts by Chinese officials, which have kept the USDCNY rate stable below the 7.3 handle through liquidity squeezes and continued pushback in the countercyclical factor, while Chinese equities are also posting sizable gains following yesterday’s monster rally on the back of the stimulus measures announced over the weekend. The big question for traders this week is whether these measures can continue to support investor sentiment through what may be a rough batch of official PMIs and if the pace of normalisation in the US labour market begins to slow, a development that could lead to further Fed tightening to Chair Powell’s own acknowledgement. In the event that China’s PMIs print so low that investors view stimulus measures as insufficient to secure 5% growth this year and US payrolls show renewed strength, we would expect the dollar DXY index to end the week above 104.50.


Yesterday marked a quiet start to the week for the euro, though admittedly one that was that was expected given the lack of major economic releases during the day. This did come, however, despite concerns over the path forward for eurozone monetary policy resurfacing at the Jackson Hole Symposium over the weekend. Granted, President Lagarde faced a more difficult task than her US counterpart in trying to manage market expectations. But the recent reduction in interest rate expectations for the Eurozone is complicating the issue, even as worse than expected August PMI’s pointed to an unmistakable economic slowdown and even a possible recession. With the chance of markets buying a possible hard-line speech skewed to the downside, Lagarde instead noted that the ECB is maintaining its June economic projections, implying that an additional 25 basis point hike remains on the table while calling for consistency in its deliberations over the past few weeks. However, as expected, OIS markets continued to lower their expectations of a 4% terminal rate, with swaps now placing the likelihood of this possibility at just 40%. The strength and resilience of the eurozone economy looks set to be front and centre once again today, with consumer confidence data out of France and Germany adding to gloomy European sentiment. The GfK Consumer confidence reading showed a further decline in sentiment amongst German consumers, falling from -24.4 to -25.5, suggesting any pickup in economic impetus is unlikely to come from this quarter. The picture was similarly dismal in France, Where August’s consumer confidence indicator printed in line with last month’s reading of 85, still well below the measures long run average. These are unwelcome developments for bullish euro traders, especially as it coincides with further bearish news on China’s growth outlook. Together, this has seen the euro start this morning in retreat, giving back some initial gains against the dollar.


Sterling price action was understandably muted yesterday, with the UK on a national Bank Holiday. This morning however, the BRC shop price index has given traders something to sink their teeth into as they return to the office. The latest reading showed that shop price growth fell from 7.6% YoY in July to 6.9% in August, and now well down on the peak of 9% seen in May. Whilst today’s fall was not unexpected given indications elsewhere that food price growth in particular would moderate over coming months, confirmation that this is playing out on shop floors will nevertheless be welcomed by policymakers. On this front, comments by the BoE’s Broadbent over the weekend at Jackson Hole were notable. Suggesting that second round inflationary effects would ease more slowly than they emerged, he went on to say that “monetary policy may well have to remain in restrictive territory for some time yet.” appearing to signal a high for longer stance that we have been anticipating from the BoE. Bank of England Chief Economist Huw Pill later this week should give markets further insight into MPC thinking in an otherwise relatively quiet week of data releases. But for now, FX traders are happy to take the pound higher, with sterling up one tenth on the dollar and two tenths on the euro to start today’s session.



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