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USD & CAD employment data should cement expectations tapering

USD - US Dollar

Global equities are heading to the end of the week in a generally better mood than when they started it. A good session across Western markets yesterday is helping most Asian indices to trade in the green this morning – including China’s stock market, which reopened after a week-long holiday. Normally, the better sentiment would warrant a weaker dollar across the board, but markets seem reasonably reluctant to let go of dollar positions.

Today, all focus will be on the US jobs report. Market consensus suggests a rise of about 500K which should be enough to endorse market expectations around a November tapering announcement and late-2022 rate hike. Ultimately, a solid number should give little reason to turn any less bearish on the greenback.

CAD - Canadian Dollar

CAD has recently found some support from the rise in global energy prices, but focus today will shift back to Canada’s September jobs data to be released at the same time as the US NFPs. A tight labour market has been a key factor keeping BoC rate expectations supported, and today’s data should leave policymakers of track to taper again this month and in December, formally concluding QE by year-end. Markets will also keep a close eye on wage growth numbers, where a meaningful increase could support inflation expectations and leave room for some speculation that the first-rate hike will come before the currently projected 2H22.

Expect CAD to emerge as a key outperformer today, especially if US payrolls prove strong enough to cement the market’s pricing on the Fed without causing a rush to price in earlier Fed tightening which could hurt equities and global risk sentiment in the process. USD/CAD could test the 1.2500 support today.

EUR - Euro

The downward trend in EUR/USD paused around the 1.1550 level amid a broad stabilization in the FX market ahead of today’s US payrolls. Most are inclined to think we could see another leg lower in the pair today as USD finds fresh support after the jobs data, although the 1.1500 support may hold before the weekend.

The eurozone calendar will offer no euro-specific drivers today, although some focus will be on ECB President Christine Lagarde joining her predecessor Mario Draghi and Treasury Secretary Janet Yellen at an event in Italy today. The euro is likely to take a back set today as markets will focus heavily on the US jobs report.

GBP - British Pound

The central theme in markets is how central bankers react to expectations of higher inflation. In the UK, markets are clearly taking the view that the BoE will be forced to act much sooner than policymakers suggest. Yesterday, some comments by the new BoE Chief Economist Huw Pill fell on the hawkish side of the spectrum as he expressed the view that higher prices will have a more persistent nature than previously thought.

Rate expectations in the UK have run too far and probably underestimated the potential headwinds to the British economy in the coming months, but markets will likely need to see some data to start pricing out imminent BoE tightening. We’ll have jobs data in the UK next week: up until then, GBP may stay by and large supported.

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