The dollar is back on its feet, having risen across the board yesterday. With a Fed firing the starting gun on its normalization process, momentum on the monetary policy divergence story seems to be swinging back towards the US which is putting a solid floor under the dollar.
Today, we’ll see US payrolls for October. Market consensus suggests a 450k increase in the headline number, as the resumption of in-person teaching in schools should have encouraged many to go back to work. From an FX perspective, we think risks are skewed to the upside. A below-consensus read may not prove enough to fully erase the dollar’s momentum that built up yesterday, especially considering that: a) Fed tightening expectations are not too aggressive, b) the last two NFP reads missed expectations, but the dollar losses were quite contained Most think that a stronger than expected read should fuel speculation about a faster tapering and/or earlier tightening, all to the benefit of the dollar.
The Canadian dollar is moderately weaker on the week, moving broadly in line with the bloc of commodity currencies. The question now is whether the upside correction in USD/CAD will extend meaningfully above 1.2500. We think this should be down mostly to external factors, as the domestic story of imminent BoC tightening remains likely supportive. Today’s jobs data in Canada should see a slowdown in hiring but unless we see a negative headline number we doubt CAD will take a hit today. Still, with a balance or risks skewed to the upside for USD ahead of US NFP, we think a move above 1.2500 in USD/CAD could be on the cards today.
The conservative hold by the Bank of England clearly had an impact beyond the UK's borders, and particularly on the ECB rate expectations, as markets scaled back tightening bets and no longer see an ECB rate hike in 2022. Earlier this week, President Lagarde reiterated her view that conditions for tightening will not be met by next year. Today, we should see a bunch of headlines from ECB speakers they have been quite ineffective on the market and we wouldn’t expect anything different today. Retail sales data for September out of the eurozone should also have a negligible market impact.
GBP/USD sold off around 1.5% in the aftermath of the Bank of England’s decision to keep interest rates unchanged. It appears that policymakers wanted to see more data on the jobs market before starting the tightening cycle. We’ll get two jobs reports before the next BoE meeting on 16 December, and we expect the dataflow to prove all in all supportive for a 15bp December hike.
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