Dollar drops may continue to prove short-lived and quite small in size as bond markets remain fragile and the narrative hawkish. French premium isn’t likely to leave the euro very soon, and risks remain of a test of 1.110 in the near term. In Canada, jobs numbers should have improved in September, but an October hike looks premature
USD: Upside Risks Persist
The dollar lost a bit of ground yesterday as Treasuries took a breather, but we don’t see signs of a broader USD correction brewing. US President Donald Trump has said the US won’t attack Iran before the 3 November midterms, but the oil market is reluctant to price out the geopolitical premium that has kept prices above despite improved Gulf supply.
Today, the focus in the US calendar is on the University of Michigan surveys. Inflation expectations are expected to tick higher, while the sentiment indicator should edge lower. Susan Collins is the only Federal Reserve member due to speak after Alberto Musalem and Christopher Waller reiterated the need to raise rates further yesterday.
With global bonds and risk sentiment still looking fragile, and a hawkish Fed narrative keeping markets convinced of a December hike, we retain a preference for a slightly stronger dollar in the near term.
EUR: Elusive Recovery
has made its way back above 1.120 on the back of broader dollar softness, but the common currency isn’t showing any signs of recovery against other European currencies (the Swiss Franc, Pound sterling, and Swedish krona).
It’s a sign that FX markets aren’t ready to scale back the French fiscal premium. The bond market is giving a similar message, with the 10yr oscillating but closing at 140bp yesterday. We don’t feel Marine Le Pen’s huge fiscal tightening promise is enough to turn the tide for French bonds, and the euro may keep suffering from the French situation for longer.
We still think 1.110/1.112 can be tested in the near term.
CAD: Improved Jobs Picture, but no October Hike
Today, the Canadian jobs report for September is expected to show a partial rebound. Consensus sees payrolls at +10k after August’s 42k contraction, and ticking higher to 6.5%.
The figures shouldn’t scream ‘October hike’, but can definitely consolidate expectations for a move by the Bank of Canada in December, which is fully priced in.
The impact on the Canadian dollar shouldn’t be big. CAD has lost around 3% in the past month against USD, but is still in the upper half of the G10 scorecard. US-Canada tensions have been put on the back burner by FX investors, and the USD remains totally dominant in . Improvement in global bond markets remains necessary for the pair to return sustainably below 1.420. The prospect of a Bank of Canada hike can lend some help only on the margin.
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