China’s Covid situation has suddenly returned as a very central driver for global markets. Over 27,000 cases were reported today, with the city of Guangzhou being the new epicentre of the outbreak. In FX, this has fuelled a return to the dollar. Optimism on China’s outlook was one of the two key forces - along with speculation about a dovish pivot by the Fed – behind the sharp dollar correction earlier this month. On the Fed side, tomorrow’s minutes will be important to watch, but the recent Fedspeak has undoubtedly added a layer of caution which could mean investors may be more reluctant to overinterpret dovish signals from the minutes. We have a few speakers to monitor today amid a very light data calendar in the US.
Canada reports September retail sales figures today. Canadian retail sales are expected to have fallen for only the second time in Q3 after not falling in the first half. The economy has lost its earlier momentum. Next week Canada will report Q3 GDP. It is expected to be halved from the 3.3% pace seen in Q2. The market is pricing in about a 20% chance of a 50 bp hike next month (December 7). In FX, the US dollar traded back to almost CAD1.3500 yesterday for the first time since the much stronger than expected jobs data on November 4. It is now trading below CAD 1.34 in the European morning. Look for the loonie to take direction from the retail sales print this morning. Observe the USD/CAD trends.
EUR/USD plunged back to the 1.0250 area as markets jumped back into defensive dollar trades yesterday. The negative impact of China’s new Covid wave and the situation in Ukraine are overshadowing the positives of lower energy prices. We see further room for a contraction in EUR/USD this winter and continue to target sub-parity levels into the new year. The eurozone calendar includes consumer confidence data and speeches by the European Central Bank's Robert Holzmann, Olli Rehn and Joachim Nagel. Expect some support at 1.0200 in EUR/USD: a decisive break below that level could underpin the return to a bullish dollar narrative and unlock more downside risks.
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