The dollar downtrend has started to prove unsustainable, and we saw a correction yesterday against most of the majors. It’s hard to see a clear trigger for the reversal in risk sentiment yesterday, and it probably boiled down to markets not being ready to bet heavily on the Fed pivot story. Markets are also keeping an eye on some “test cases” in the central bank sphere. While the Reserve Bank of Australia slowed the pace of hiking on Tuesday, the Reserve Bank of New Zealand stuck to 50bp increases yesterday, signalling that a 75bp move was considered and that more hikes are on the way. The hawkish narrative should prevail for the Fed, ultimately capping the recovery in risk assets and offering widespread support to the dollar. The data calendar in the US is light today after yesterday’s ISM Services beat expectations (and partly offset the Manufacturing miss) and ADP labour numbers for September came in at 208k (exp. 200k).
The US dollar seems to have found a bottom against the Canadian dollar in the past two sessions near 1.3500. It recovered yesterday and closed above 1.3600. The currency pair is taking its cues from equities and the general risk environment. Correlation studies show the CAD’s correlation with stocks remains the biggest influence on CAD movement —and we look for that pattern to continue. Look for the greenback to remain strong against the CAD in the short term. Observe the USD/CAD trends.
EUR/USD showed some resistance at the 1.0000 level yesterday before falling back down on the dollar’s recovery. Despite the pair having crossed the parity line multiple times recently, this may have increasingly been interpreted as a benchmark level for the broader dollar trend. Considering the reluctance to turn more bullish on the euro into what should be a challenging winter for the eurozone, a sustained recovery to levels above parity in EUR/USD might now only be driven by markets buying more aggressively into the Fed pivot story. For now expect the EUR/USD to stay pressured into the 0.90-0.95 in the last months of the year.
The pound has continued to realign with the moves in other European currencies although still displaying residual signs of above-average volatility. If sterling absorbed a large share of the negative news during the post-tax event UK market turmoil, it now appears to be trading a bit too much on the strong side. Today, markets will keep an eye on the Bank of England Decision Maker Panel survey, which collects inflation expectations from company executives. Most expect a drop below 1.10 in the near term
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