USD selling not sustained for long!
USD: Official data still favours USD and hence the rebound
The US dollar after a surprise and notably large sell-off on Monday, reversed sharply stronger yesterday, basically reversing the entire loss from Monday. We did conclude yesterday that although this might be the first signs of “peak US exceptionalism” it was also premature to conclude that the US dollar was about to sell-off on a sustained manner. Positioning could have seen a further period of selling but the official data flow yesterday remains supportive for the dollar and ultimately that helped encourage USD bulls into buying at levels just 24hrs earlier seemed unreachable. The PMIs in Europe were the initial catalyst for EUR selling with the euro-zone’s three PMI readings all coming in weaker than expected and providing further evidence of the prospect of mild recessionary conditions being realised.
In our view that in of itself doesn’t preclude a move higher in EUR/USD. A macro backdrop of recession does not mean EUR/USD is heading lower. A level of 1.0500 for EUR/USD in large part we believe captures the current divergence between the euro-zone and the US. The PMIs from the US were the complete contrast of the PMIs in the euro-zone – all three PMIs in the US were stronger than expected. The rates market reaction has been a little more muted. The 2-year UST bond yield jumped about 5-6bps but the 10-year UST bond yield barely budged with all of the drop from the high on Monday from the 5.02% high still intact. But in FX, the market was quick to fully reverse the Monday move and some more.
Our point in yesterday’s FX Daily still stands – despite yesterday’s drop in EUR/USD, at around the 1.0600 level there is still a case to argue EUR resilience given the market moves we have had over the last month in terms of the rise in US yields; increased periphery concerns related to Italy and the rise in natural gas prices after the Hamas attack on Israel. That resilience is highlighted by the chart above showing EUR/USD versus EUR performance against the remaining G10 currencies excluding the dollar. The EUR vs G10 ex-USD index hit a year-to-date high yesterday.
We argued in our latest Foreign Exchange Outlook released on 1st October (here) that there was a window open for further US dollar strength but that window would probably close by before year-end and we would then see a retracement. That would be based on emerging weaker economic data from the US. Tomorrow will see very strong data for Q3 GDP (4.5% Q/Q SAAR consensus) that captures a lot of the strong data through the summer that saw US yields shoot higher and EUR/USD drop from 1.1200. The current consensus for Q4 Q/Q SAAR growth is just 0.7%.
EUR VS G10 (EX-USD) INDEX AT YEAR-TO-DATE HIGH
Source: Bloomberg, Macrobond & MUFG GMR
CAD: BoC in focus as yields move in favour of the USD
The Bank of Canada meets today and there is a high probability that the BoC will hold its key policy rate with signs beginning to emerge of slowing economic activity. The Canadian dollar has weakened by less than other higher beta G10 currencies since the Hamas-Israel conflict began in part helped by higher energy prices. The announcement overnight of CNY 1 trillion of additional stimulus in China through the issuance of sovereign bonds to be spent on infrastructure through this year and next will help the likes of CAD.
The decision today is straight-forward and the OIS market indicates a near 100% probability of an unchanged policy rate. The curve now has now more than 9bps priced before moderate rate cuts are expected in the second half of next year.
There is certainly building evidence of weakening economic activity since the BoC last hiked in July. Real GDP contracted by 0.2% Q/Q SAAR in Q2 while the July m/m GDP was unchanged, weaker than expected. The latest inflation readings for September were all weaker than expected while the BoC quarterly Business Survey remains weak.
The updated forecasts provided today are also likely to be revised down given the flow of data since the last update on forecasts in July. All of this would suggest the tone of communications by the BoC could be a little more dovish and while that’s a risk the BoC will probably be reluctant to provide a signal to the market that it is done with tightening. Further declines in inflation may be required. Wage growth is also elevated with the latest annual wage growth reading at 5.3%, stronger than expected.
The OIS curve only has about 14bps of rate cuts priced by September next year, compared to 45bps in the US with the data from Canada certainly more skewed towards the potential for rate cuts in 2024. We suspect that pricing will not move dramatically given our assumption that despite the signs of weaker growth the BoC today will repeat its guidance that they are “prepared to increase the policy rate further if required”. Assuming this guidance is repeated the rates and FX reaction should be relatively contained. An earlier than expected removal of that guidance would see CAD underperform given the potential for more rate cuts to be priced into the curve for 2024. That seems an unnecessary step for the BoC to take at this time. We judge USD/CAD as overshooting based on yields and crude oil prices and a repeat of the current guidance may prompt some USD/CAD correction lower.
USD/CAD OVERSHOOTING OUR FAIR-VALUE ESTIMATE
Source: Macrobond & Bloomberg
KEY RELEASES AND EVENTS
|
Country |
BST |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
|
SZ |
09:00 |
ZEW Expectations |
Oct |
-- |
-27.6 |
! |
|
|
GE |
09:00 |
German Business Expectations |
Oct |
83.3 |
82.9 |
!! |
|
|
GE |
09:00 |
German Current Assessment |
Oct |
88.5 |
88.7 |
!! |
|
|
GE |
09:00 |
German Ifo Business Climate Index |
Oct |
85.9 |
85.7 |
!! |
|
|
EC |
09:00 |
M3 Money Supply (YoY) |
Sep |
-1.7% |
-1.3% |
! |
|
|
EC |
09:00 |
Loans to Non Financial Corporations |
Sep |
-- |
0.6% |
! |
|
|
EC |
09:00 |
Private Sector Loans (YoY) |
-- |
1.0% |
1.0% |
! |
|
|
US |
12:00 |
MBA Mortgage Applications (WoW) |
-- |
-- |
-6.9% |
! |
|
|
US |
15:00 |
New Home Sales |
Sep |
680K |
675K |
!! |
|
|
CA |
15:00 |
BoC Monetary Policy Report |
-- |
-- |
-- |
!!! |
|
|
CA |
15:00 |
BoC Rate Statement |
-- |
-- |
-- |
!!! |
|
|
CA |
15:00 |
BoC Interest Rate Decision |
-- |
5.00% |
5.00% |
!!! |
|
|
CA |
16:00 |
BoC Senior Deputy Governor Rogers Speaks |
-- |
-- |
-- |
!! |
|
|
CA |
16:00 |
BoC Gov Macklem Speaks |
-- |
-- |
-- |
!!! |
|
|
US |
18:00 |
5-Year Note Auction |
-- |
-- |
4.659% |
!! |
|
|
EC |
18:00 |
ECB President Lagarde Speaks |
-- |
-- |
-- |
!!! |
|
|
US |
21:35 |
Fed Chair Powell Speaks |
-- |
-- |
-- |
! |
|
|
AU |
23:00 |
RBA Assist Gov Kent Speaks |
-- |
-- |
-- |
!! |
|
|
AU |
23:00 |
RBA Gov Bullock Speaks |
-- |
-- |
-- |
!!! |
|
Source: Bloomberg
