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Canadian inflation at highest level in almost two decades

USD - US Dollar

A broad dollar trend has been conspicuous by its absence this week. Perhaps this should not be a surprise given conflicting themes around the world and also within the US as well. There is a creeping sense that with higher vaccination rates, Europe could be slightly more resilient than the US to fresh waves of the pandemic in the northern hemisphere this winter. Yet US growth is more proven and for financial markets, the Fed looks set to be well ahead of the ECB in normalising policy.

In the US today, the focus will be on August retail sales and it t seems unlikely investors will want to build momentum behind any fresh trends in the dollar until the Sep 22nd FOMC event risk has passed.

CAD - Canadian Dollar

The CAD is stuck in a range despite data showing that Canada’s annual inflation rate rose to 4.1% in August, the highest level in 18 years. Economists were only expecting a 3.9% annual gain. This acceleration was boosted by increased gasoline prices and new home prices, according to Statistics Canada. The BoC expected inflation to reach 3.9% in Q3 in July’s MPR so the pick-up in prices might not move the inflation concern needle significantly. BoC expectations seem a tad more resolute than the Fed’s at this point but neither supportive, short-term spreads nor the gains in crude are helping CAD sentiment at the moment.

EUR - Euro

The ECB's Schnabel delivered a speech to bond market participants yesterday on why sovereign bond yields are so low. Key take-ways for us were; a) dismissing the idea that low bond yields were driven by secular stagnation fears and b) the market waking up to the new reaction function of central banks, such that the policy trigger finger in response to higher inflation would be softer.

The implication for the EUR here suggests that it is going to take a lot for ECB policy to drive the EUR higher. We see EUR/USD in a 1.17-20 range until year-end and then heading lower through 2022 as Fed tapering turns into tightening. For today, EUR/$ could have another run at 1.1850 on soft retail sales but end the day back at 1.1800.

GBP - British Pound

GBP continues to hold its own and certainly the above consensus August CPI release made its mark. Above consensus, CPI has seen UK money markets react with more bullish expectations of BoE policy over the coming months.

Should UK growth/inflation data come in on the strong side, the market's search for the BoE terminal rate could keep GBP supported. 1.3800-1.3900 should hold Cable near term.

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