Further dollar highs

Despite our expectations for this week, the dollar managed to chart new multi-year highs, with the DXY index briefly testing the 108 level. For context, the last time the index was this strong was late 2022. Even so, the week did not start this way, with our base case for a modest dollar pullback appearing to play out. The second half of the week, however, saw geopolitical risks come to the fore. News that Ukraine had struck targets in Russia with long-range missiles was set against nuclear sabre rattling from the Kremlin, prompting a significant greenback haven rally. That said, the dollar’s climb was assisted by data outside the US this week too, most notably European PMIs on Friday, which significantly undershot expectations as political risks weighed on European sentiment. While this served to see the euro and the pound slump versus the dollar, one currency that largely held its ground last week was the loonie, helped by an upside surprise to CPI data. This nudged markets in the direction of a 25bp cut in December, and a fiscal stimulus package announced on Thursday put the final nail in the coffin for a 50bp cut in our eyes. While this is likely to mean pain delayed not avoided for the Canadian economy, for now, it is enough to see CAD outperform.

Considering this, next week Canadian GDP print takes on much less significance than it otherwise would. That leaves the RBNZ, alongside Australian and Eurozone CPI as the main events for markets next week, with divergence likely to be a major theme. In the Antipodes, the RBNZ looks set to cut by 50bps, even as Aussie inflation points to the RBA staying on hold well into 2025. Meanwhile in Europe, although we continue to think a succession of 25bp cuts is still the more likely path for rates, a soft CPI print could put a 50bp December cut back on the table for the ECB. If realised, this would prompt a further widening in US-EZ rate spreads, a dynamic that could leave open the door to a test of EURUSD parity before the year is out.

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Author: 

Nick Rees, Senior FX Market Analyst

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