The IMF delivered a warning yesterday as it cut its year-ahead world GDP forecast for the third time this year, from 2.9% to 2.7%. The theme of excessive tightening and the damage to the world’s economy has taken a more central role in the IMF report. This is the narrative that is keeping the general trend in risk assets bearish and the dollar supported, and we do not expect it to change until 1Q23 at the earliest. Domestically, the US calendar includes PPI for September and the September FOMC meeting minutes. The latter should show some degree of alignment within the committee around the need for another large (75bp) move in November. Expect the greenback to remain strong given the risk-averse developments in Europe and Asia.
The USD/CAD set a new two-and-a-half year high yesterday near 1.3855. It is trading quietly within yesterday's range with a softer tone today. Initial support is seen near 1.3715 on the lower end. Short-term US-Canada spreads have swung sharply in the USD’s favor following the and while that is a plus for the USD, spreads have not been a significant driver of the USD’s performance in recent weeks. CAD weakness largely reflects 1) the broader USD tone and 2) risk aversion. These factors will continue drive CAD direction in the coming weeks.
The highlight of the day in the eurozone is the speech by European Central Bank President Christine Lagarde at the IIF annual meeting in Washington. With two weeks to go to the October ECB meeting, markets are almost fully pricing in a 75bp hike. The implications for the euro should not be very large given the currency has been significantly less sensitive to domestic monetary policy expectations. The ongoing discussion among EU members about price caps on energy prices is set to have broader implications than the ECB rhetoric at this stage. There remains downside risks to 0.9540 for the EUR/USD this week.
The roller coaster ride in GBP looks far from over. Yesterday, Bank of England Governor Andrew Bailey surprised by announcing that emergency gilt purchases will be discontinued – the remarks triggered a drop in the pound below the 1.1000 threshold. In other news UK markets are assessing the credibility of a report by the Financial Times that the BoE communicated privately to banks that the emergency buying programme may actually be extended beyond this week. Today, speeches by MPC members will be very closely watched. Expect more volatility in the pound with expectations for the GBP/USD to drop to the 1.00-1.05 area by the end of the year.
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