The rout in equity markets and the sharp sell-off in tech stocks yesterday reversed some of the past gains in pro-cyclical currencies and temporarily helped USD, yet the FX market has already shown signs of stability overnight, with the USD rebound pausing. Some form of correction in stock markets does not come a surprise, following their multi month sharp rise as well as concerns about the lofty valuations, but given the Fed’s willingness to ease more (should it be necessary - with stock markets’ price action likely being a consideration) as well as the uninspiring USD outlook (where the Fed’s shift to average inflation targeting points to a prolonged period of low USD nominal and real rates), we don’t expect a long lasting negative spillover into FX markets. The negative USD remains intact and we look for a multi quarter bearish dollar trend, with the latest USD rebound being a short-term correction, rather than a start of the trend. Today, the focus is on the US labour market report. Our economists look for a below-consensus NFP and unchanged unemployment rate. With the current nervousness in the marketplace, softer US numbers may modestly weigh on risk and further help the dollar today.
CAD: Economists are forecasting a 250K employment gain in August, continuing the trend of sizable, but smaller gains as the recovery continues. Such a gain would still leave total employment 1.1mn below the February level and the hardest hit services sectors (e.g. food/accommodation) should remain well below pre‐ pandemic levels. Part‐time job gains rose almost 350K in July – well exceeding the full‐time increase of 73K – and expect some reversal of that composition this time around.
Thursday’s correction higher in USD/CAD opens up 1.3183 as the next resistance level to watch – a daily close above it is required to signal a bullish trend reversal. There is not much in the way of support until 1.3029, ahead of the psychological 1.3000 threshold and the 2019 low at 1.2952.
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