Global risk sentiment has rebounded after absorbing the news about China’s new Covid wave. One factor driving the rally has been increasing speculation that China is loosening its regulatory grip on the tech sector, essentially offering a lifeline to tech shares which have gone through some rough months. However, this sharp recovery in sentiment appears a bit premature. Today, all eyes are on the FOMC minutes, the big risk event before a quieter rest of the week as the US enters the Thanksgiving holiday break. Investors will scan the minutes for indications that the “higher for longer” plan is linked to short-term dynamics in CPI releases. In FX, the dollar has faced a new round of selling. This correction could run a little further, but we continue to expect a rather radical shift in the bearish dollar trend in December as the Fed remains broadly hawkish, energy prices rise again and the global economy slows.
The CAD is a relative under-performer on the session. Soft oil prices may be weighing on CAD sentiment to some extent. The fundamental backdrop remains a bit more supportive, however, with data suggesting the economy retains a bit more momentum than might have been expected after a series of rate hikes. In FX, the US dollar has found support near CAD 1.3360 against the Canadian dollar. The nearby resistance is likely to be CAD 1.3420-40, with CAD 1.35, a firmer resistance line. The Bank of Canada recognizes that its aggressive tightening is slowing economic activity. The market is nearly evenly split between a 25 bp and 50 bp rate hike on December 7. Observe the USD/CAD trends.
The risk rally sent EUR/USD back above 1.0300. Improvement in China-related sentiment is a positive development for eurozone assets and the euro, but swings in the pair remain primarily a function of broader dollar moves. The eurozone’s calendar includes November’s PMI numbers today. The Fed minutes are the most important event for EUR/USD today, along with further changes in the market's sentiment on China. An extension of the rally to 1.0400/1.0450 is possible in the coming days, but a return to parity in the next few weeks remains our base case as we enter a challenging winter for the eurozone economy.
PMIs will be released in the UK today, and the consensus is looking for a further deterioration in both the manufacturing and composite gauges, possibly due to the prospect of austerity measures by the new UK government. Chancellor Jeremy Hunt will testify before the Treasury Committee about his Autumn Statement this afternoon. The extended correction in the dollar is now pushing cable towards 1.2000. Expect some resistance around that level given the lack of strong domestic drivers.