The dollar showed tentative signs of recovery yesterday but appears to be lacking any strong support. While most don’t expect a USD-bearish narrative in the longer run, there may be extra downside room for the greenback this week. With the US calendar being light, the two main drivers of global sentiment are China and Fed speakers. With respect to the first, there are two aspects to consider: data and diplomatic talks. Asian equities are rallying this morning, and this appears to be due to general optimism after a long meeting between US President Joe Biden and Chinese President Xi Jinping at the G20 meeting yesterday. On the Fed front, we heard from both sides of the hawk-dove spectrum yesterday. The hawk Christopher Waller dismissed the deceleration in core inflation as just “one data point” and that more data was needed to conclude tightening should slow. For now, we read recent Fedspeak as further indication that a bearish dollar call on the back of Fed dovish bets still appears premature. Today, the data calendar includes October Empire Manufacturing and PPI figures. Some extra near-term USD weakness is possible, but we suspect we are reaching the bottom of the recent downtrend.
Canada's manufacturing and wholesale sales figures expected for September this morning but the impact on the market is likely minimal. After growing more than 3% (annualized rate) for the past four quarters, the Canadian economy has downshifted. The median forecast in Bloomberg's survey is for 1% growth in Q3. Starting with the fourth quarter, economists do not see growth coming close to 1% again until late next year. The market may be more sensitive to tomorrow's data. It includes existing home sales, which have declined for seven months through September. Canada also reports October CPI figures. The median forecast in Bloomberg's survey sees a 0.8% increase, which given last October’s 0.7% rise, suggests the headline year-over-year rate may edge up to 7.0% from 6.9%. The underlying measures, which the central bank puts more weight on, may rise slightly on average. Markets are leaning toward a 25 bp hike by the Bank of Canada when it meets next on December 7. There is about a 37% chance a 50 bp hike. Look for the CAD to remain strong in the immediate short term and possibly target 1.32. Observe the USD/CAD trends.
November’s ZEW survey is the main release to watch in the eurozone’s calendar today, and expectations are for an improvement on the back of lower energy prices. Later this morning, it will be worth watching for any revision in the eurozone’s third-quarter GDP numbers. EUR/USD strength is largely a USD story, and any support to the euro appears largely driven by energy prices. We could see another leg higher in the pair over the coming days, and 1.0500 could be at reach, even if we expect a relatively fast descent over the winter.
Ahead of the Autumn Budget announcement in the UK this Thursday, markets are being flooded with reports about which measures will be announced. Chancellor Jeremy Hunt is now widely expected to deliver a 40% windfall tax on energy companies’ excess profits, while it’s been reported that the minimum wage will be raised from £9.50 to £10.40 an hour. Expect more headlines – and some sterling reaction – today. On the data front, jobs numbers were released in the UK this morning. As expected, the unemployment rate edged higher but was mostly driven by hiring freezes rather than rising redundancies. Reduced labour supply remains a bigger concern, especially as long-term sickness numbers continue to rise. Most analysts expect a 50bp hike by the Bank of England in December.
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