CAD weakened to a 2 ½ year low overnight. Is there a potential move toward 1.40?
Despite reduced volatility due to the US markets’ closure yesterday, the generalized risk-off environment saw the dollar start the week a little bullish against most FX. We heard some slightly less hawkish comments by Fed officials yesterday. Admittedly, they did come from two of the most “dovish” members of the FOMC – Lael Brainard and Charles Evans – who both seemed to suggest a higher caution over excessive tightening, while still reiterating the commitment to fight inflation. There is still little doubt among market participants that the overall consensus within the FOMC is firmly hawkish, and that a 75bp hike in November should not be particularly challenged by doves. The US calendar is light today, leaving FX to trade on boarder market themes.
The Canadian dollar weakened 1.3855 against the USD overnight - a two-and-a-half year low. The pair could rise (Canadian dollar weakness) toward 1.3880 today, but in the larger picture, analysts see a potential move toward CAD1.40. Given Bank of Canada Governor Macklem's recent comments, the Canadian dollar's weakness may prompt the central bank to hike 75 bp at its next meeting on October 26. The market has only about a 25%-30% chance discounted for now with most expecting a 50bp hike. Look for the loonie to trade on broad market themes and be driven by equity moves and risk sentiment in the short term.
The euro received negligible help yesterday from news that German Chancellor Olaf Scholz has ultimately given support to a joint issuance of EU debt to fund measures against the energy crisis, with the condition that funds are distributed as loans and not grants. The market impact should be quite straightforward - more ECB tightening if the Bank views these measures as inflationary. For the euro, the net impact may well be neutral in the near term, potentially positive in the longer run. Today, the eurozone’s calendar is quite light. Overall, the EUR/USD is likely to decline into the 0.9540 September lows over the coming days, and target 0.9200 as a year-end level.
The UK debt market faced a fresh round of turmoil yesterday, with 10-year inflation-linked yields rising by 64bp, signalling how the British bond market remains highly dysfunctional. This morning, the Bank of England delivered another pre-market attempt to calm investors, by announcing it will widen the scope of daily purchase operations, including inflation-linked bonds. All eyes today will be on how the market will receive the new emergency measures by the BoE, with a specific focus on the results of a 30-year auction. n the data side, UK jobs data came in quite solid this morning, with average weekly earnings touching 6.0% YoY, ultimately offering no reasons for the BoE to turn less hawkish.
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