USD rally extends into September

USD: Weaker NFP report fails to derail USD’s upward momentum

The US dollar has continued to trade at stronger levels overnight after strengthening further at the end of last week. It has resulted in the dollar index moving back closer to last month’s high at 104.45 from 25^th August. The intra-day high from 31^st May at 104.70 is also close by which if broken could open the door for the US dollar rebound to extend towards the year to date high from 8^th March at 105.88. The US dollar’s rally on Friday meant that the dollar index strengthened for the week as a whole which was the seventh consecutive week of gains after it hit a year to date low of 99.58 on 14^th July. The price action continues to favour further US dollar upside in the near-term as it was still able to extend its advance following the release of the weaker than expected non-farm payrolls report on Friday. The report revealed that US employment and wage growth had slowed more than expected, and reinforced expectations that the Fed will leave rates on hold in September. After incorporating downward revisions to prior months, employment growth has averaged 150k/months over the last three months which represents a sharper slowdown when compared to average employment growth of 287k/month in the first five months of this year. It should give the Fed more confidence that demand for labour is softening.

At the same time, there was further evidence of a pick-up in labour supply which is also helping to ease upside risks to the inflation outlook from the labour market. The household survey revealed that the labour force increased by 736k in August and the number of unemployed jumped by 514k as presumably those re-entering the labour force are finding it harder to find a new job as hiring has slowed. It has resulted in the unemployment rate moving further above the cyclical low from January at 3.4% up to 3.8% in August. The more favourable demand and supply dynamics will dampen upward pressure on wage growth. After a couple of stronger prints in recent months, it was reassuring to see average hourly earnings growth slow to 0.2% in August. Overall, it was a very encouraging report for the Fed and should strengthen the case for it to bring an end to their rate hike cycle given rates have already been lifted well into restrictive territory and inflation pressures continues to ease. The US rate market has become more confident that rates will remain on hold through the rest of this year, but is reluctant to price in more cuts into next year with just over 100bps cut already priced.
The resilience of the US dollar to the weaker non-farm payrolls report could reflect: i) the relative cyclical outlook is continuing to provide more support for the US dollar in the near-term with market attention more focused on weaker growth outside of the US, and/or ii) the non-farm report is not yet weak enough to reinforce speculation over the Fed cutting rates more aggressively and/or earlier in 2024. In our latest monthly FX Outlook report (click here) released on Friday, we revised up our forecasts for the US dollar through the remainder of this year to reflect better fundamental support for the US dollar in the near-term. We have pushed back our outlook for the US dollar to weaker further into the 1H of next year.

CAD IS ALREADY TRADING AT A DISCOUNT

Source: Bloomberg, Macrobond & MUFG GMR

CAD: Weaker growth eases pressure on BoC to hike rates further

The Canadian dollar has continued to trade at weaker levels overnight following the sell-off at the end of last week triggered by the release of the softer than expected GDP report from Canada on Friday. The report resulted in USD/CAD moving back up to the 1.3600-level which is closer to where the highs are located from in April and May at 1.3668 and 1.3655 respectively. USD/CAD was supported by yield spreads moving in favour of the US. The weaker than expected GDP report from Canada has prompted the Canada interest rate market to become more confident that the BoC will now leave rates on hold through the rest of this year and to price in more rate cuts into next year. However, the amount for rate cuts priced in by the end of next year at around 33bps is still much less than in the US where just over 100bps of cuts are priced. We see more room for the Canadian rate market to move closer to pricing in the US rate market for more aggressive rate cuts  next year which is one of the reasons why we expect the Canadian dollar to underperform in the year ahead (click here).  

The latest GDP report revealed that Canada’ economy unexpectedly contracted by -0.2% in Q2 following a downwardly revised expansion of 2.6% in Q1. It was the second time in the last three quarters that GDP has contracted marginally and provides further evidence that Canada’s economy is slowing in response to higher rates. Over the last year, the average quarterly pace of GDP growth has slowed to 1.1% compared to 4.7% in the year to Q2 2022. It was a big downside surprise for the BoC who had been expecting growth of 1.5% in Q2 following growth of 3.1% in Q1. Economic growth has also got off to a soft start in Q3 posing downside risks to the BoC’s forecast of 1.5%. With growth currently running below the BoC’s estimate for potential output of between 1.4% and 3.2%, there is less pressure on the BoC to keep hiking rate. Our short-term valuation signals though  that the Canadian dollar is already trading at undervalued levels, i.e bad news is already well priced in.  

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:00	GDP QoQ	2Q	0.0	0.3%	!!
EC	09:30	Sentix Investor Confidence	Sep	- 20.0	- 18.9	!!
IC	10:00	Current Account Balance	2Q	--	-10.1b	!!
EC	12:30	ECB's Elderson Speaks				!!
EC	14:00	ECB's Nagel Speaks				!!!
EC	14:30	ECB's Lagarde Speaks				!!!

Source: Bloomberg