Risk assets underperformed at the start of this week, with two major variables affecting global sentiment. First, social unrest in China. Investors appear to be gravitating towards the risk-negative narrative of possible instability in the country. The second element relates to concerns that this week's events, which include tomorrow’s speech by Fed Chair Jerome Powell (where we see a higher likelihood that he will sound hawkish) and US jobs data (which could stay strong), may cause the Fed's communicated and perceived narrative to drift away from dovish expectations. This should be a dollar-positive combination. Today's US calendar includes some housing data as well as the Conference Board Consumer Confidence Index, which is expected to have dropped further in November.
Despite the USD correction lower this past month, the Canadian dollar has lagged behind its G10 counterparts. The decline in crude prices, which have returned to the trading range observed before Russia's invasion of Ukraine, has been the main factor holding back the loonie's recovery. That said, most analysts continue to see the upside risks for oil prices into the new year, and CAD’s limited exposure to China/Ukraine and superior liquidity are good arguments to expect CAD to outperform other FX currencies in 2023, should risk sentiment stabilize. Today, Canada’s third-quarter growth data will be published, and expectations are for a 1.5% annualized increase. This should prompt the Bank of Canada to hike by 50bp next week. Observe the USD/CAD trends.
EUR/USD failed to break the 1.0500 threshold yesterday and has dropped back to the 1.0350/1.0400 area after a widespread recovery in the USD. Today the domestic story will receive a lot of attention. Inflation readings in Germany and Spain will provide hints about eurozone-wide data due tomorrow. The consensus is for German headline inflation to stabilize at 10.4% and eurozone figures to slow slightly tomorrow. It's difficult to see this significantly altering the ECB's narrative, but an above-consensus print may prompt markets to seriously consider a 75bp hike in December. At this point, a drop below 1.0300 is more likely than a rebound to 1.0500.
Today's UK calendar is light on data, but there is one event to keep an eye on: Bank of England Governor Andre Bailey's testimony to the House of Lords. A significant shift in Bailey's policy rhetoric two weeks before the BoE meeting appears unlikely, but the proximity to the meeting also means that markets tend to over-interpret MPC comments. The most likely scenario for the December announcement is a 50bp increase; markets are currently pricing in 57bp. GBP/USD has fallen back below 1.2000 as the greenback has regained some ground. There appears to be room for further depreciation into the end of the year as the greenback finds more support and the pound continues suffers from a bleak UK economic outlook.
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