The ongoing bond sell-off continues to have a net-positive effect on the dollar which gained against all G10 currencies yesterday. All considerations on whether the dollar rally is truly overstretched will likely have to wait for today’s jobs numbers. The current market pricing for the Fed rate path still leaves some room for hawkish re-pricing. A 75bp rate hike in September is not fully in the price (currently 68bp) - further evidence of tightness in the jobs market can encourage speculation on a larger rate hike. The question now is whether jobs data will be enough to trigger another bullish dollar reaction. Most analysts expect a 250k headline: a widely expected slowdown from July’s 528k surprise, but with the unemployment rate staying at 3.5%, no slowdown in wage growth and the lack of qualified staff still being the main hindrance to job growth, the overall message for investors may still be broadly encouraging.
Yesterday, the US dollar briefly crossed over CAD1.3200 before settling near CAD1.3155. As of right now, it has stalled short of the two-year high hit in July around CAD1.3225 and is trading in a tight trading range. At the conclusion of the following week, following the Bank of Canada meeting on September 7, Canada will release its August jobs data. After the 100 bp surprise in July, the market seems to be okay with a 75 bp increase. The weaker-than-expected Q2 GDP, the smaller-than-expected current account surplus, and yesterday's August manufacturing PMI reading—the lowest since June 2020—all support the notion that Canada's economic outperformance is coming to an end.
The main data release to watch today in the eurozone is PPI figures for July, which should mark a clear acceleration although will likely have limited market implications. EUR/USD has recovered a bit of ground in overnight, likely on the back of the news that Russia should resume gas flows through the Nord Stream pipeline at 20% of capacity on Saturday. It is, however, a limited positive reaction by the euro, which likely denotes how markets remain very cautious to price out the risks of a complete cutoff in gas supplies in the coming months. We see the potential for another round of dollar appreciation today after the NFP, which may force a re-test of 0.9900 in EUR/USD before markets close for the weekend.