The dollar has softened a little this week. The move looks less like any kind of de-rating of the US economy or the Fed cycle and more an issue of investors looking for bargains in bond and equity markets. After yesterday's soft US October consumer confidence data and softer house prices, the focus today is on new home sales, which may fall 15% month-on-month. It should be clear by now that the housing sector is firmly in the firing line of the Fed's restrictive policy, but it will be important to see other sectors of the US economy slowing for the Fed to conclude that aggregate demand is soft enough to offset supply constraints.
The Bank of Canada (BoC) meets to set policy rates today and is expected to deliver a hawkish hike in the policy rate to 4.00% today. The Canadian dollar has been the best-performing G10 currency against the dollar this year but is still down 7%. If and when the dollar turns, the Canadian dollar should be at the forefront of the move. The problem has been, however, that the Canadian dollar has the highest correlation of the G10 currencies with world equity markets. We look for a move back to and probably below 1.30 in USD/CAD next year. Timing is everything, of course. If equity markets can remain stable today, the hawkish BoC event risk could push USD/CAD down to 1.3500 on the day. But a sustained move below 1.30 requires a turn in the big dollar trend, which may not be a story until 2Q23.
It has been several weeks in the making, but it does now seem that EUR/USD is responding to the lower natural gas prices and the improvement in the terms of trade position. That means a break of 1.00 could trigger quite a sharp move to 1.02. It is probably a question then of whether the 1.00 level can hold EUR/USD up to and including tomorrow's ECB meeting, before next week's Fed meeting could provide some more support to the dollar.
UK asset markets and the pound took another leg higher yesterday as new PM Rishi Sunak took charge. It is a familiar-looking cabinet with Jeremy Hunt welcomed by the markets as Chancellor. The UK's sovereign credit default swap has now recovered to pre 'fiscal event' levels. The question is whether sterling needs to rally much further. 1.1500 is clearly a big level in GBP/USD. A break could see the correction extend to 1.1750. The UK data calendar is light today, with some focus on whether the 31 October medium-term fiscal plan will be delayed a few days
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