FX Update: Low ceiling for Bank of Canada surprises. FX Update: Low ceiling for Bank of Canada surprises. FX Update: Low ceiling for Bank of Canada surprises.

FX Update: Low ceiling for Bank of Canada surprises.

John Hardy

Head of FX Strategy

Summary:  The US dollar rally sparked by the ISM Services survey extended yesterday, but was driven more by the correlation with weakening risk sentiment as US treasuries reversed their yield gains from the prior day. Today’s Bank of Canada in the spotlight as the market is split on the likely size of the rate hike, but with perhaps little at stake if Governor Macklem and company confirm that a pause in the rate hike cycle is fast approaching.

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FX Trading focus: Half-hearted USD rally extension, BoJ member weighs in against tightening, Bank of Canada on tap.

The USD stayed bid yesterday on weak risk sentiment, but with the rally extension feeling a big half-hearted and unwinding a bit in today’s trade. Overnight, one of the bigger movers was USDJPY, which challenged above the important 137.50 area (prior range low) this morning after BoJ board member Toyoaki Nakamura supported the BoJ’s current easy policy, noting that the elevated inflation in Japan in the recent cycle is not wage-driven. Nakamura expressed concern that policy tightening might prompt the return of deflation. It’s worth noting that, while USDJPY needs probably at least 139.00 to suggest a reversal of the most recent sell-off leg, other JPY pairs like EURJPY are in full reversal mode as of this writing, with that pair pulling well back into the former range and above 144 today.

Elsewhere, USDCAD is making a bid at establishing a new up-trend, AUDUSD has posted a bearish reversal, and EURUSD & GBPUSD still need more downside to suggest a similar reversal, while all USD traders are holding their collective breath for next Tuesday’s US November CPI print and the FOMC meeting the following day.

The victory of Democrat Raphael Warnock in the Georgia Senate run-off race increases the ability of the Democrats to continue with appointments and move forward with the general business of governing, but doesn’t matter much as the GOP has a narrow majority in the House for the next two years.

Watch out for the UK November RICS House Price Balance survey up tonight, the survey has suffered a record-setting pace of declines, from 51% August to -2% in October. The survey is the percent of polled property surveyors seeing rising versus falling house prices.

USDCAD has lurched into a fresh upside breakout attempt, driven far more by CAD weakness than USD strength as M&A sparked some of the former (HSBC divesting its Canadian operations), but with a huge pile-on of pressure on the loonie this week on the steep retrenchment in risk sentiment this week, together with a massive downdraft in crude oil prices. As noted below, the market is divided on whether the BoC goes with a 25-bp or 50-bp move today, but guidance is far more important as we watch how firmly Governor Macklem signal the imminent end for at least this part of the tightening cycle. The move looks technically strong here, but it would be helpful to see the greenback doing more of the heavy lifting. A close above 1.37-38 could suggest an attack on the nearly 20-year highs above 1.4600, but likely only if the greenback finds new rally legs heading into 2023.

Source: Saxo Group

Bank of Canada meeting today – market divided on anticipated hike size. The Bank of Canada has shown considerable flexibility in its tightening path, having hiked 100 basis points in one go back in July, followed by a 75-basis point hike in September and 50-basis points hike in October. With that pattern in mind, the market is divided on whether the BoC will hike 50- or 25 basis points today, with market-pricing in swaps leaning for the smaller hike, while the majority of surveyed analysts are looking for another 50 basis points, which would take the policy rate to 4.25%. Regardless, the market is pricing that the Bank of Canada is nearing the end of its hiking cycle, projecting a peak rate next year of sub-4.50%.Whether its 25 or 50, the bank has signaled that it is nearing the end of its tightening cycle, although there is plenty of wriggle room for tweaking guidance after Governor Macklem’s press conference after the October 26 BoC meeting, at which he said: “This tightening phase will draw to a close. We are getting closer, but we are not there yet.” A recent speech by deputy governor Carolyn Rogers highlighted the rising vulnerabilities in Canada’s financial system from the sharply higher rates while also touting the resilience of the system and confidence that the Bank will get on top of inflation.

Table: FX Board of G10 and CNH trend evolution and strength.
NZD continues to astound, with weak Australia GDP overnight helping AUDNZD lower still, and it’s a long wait for the next RBNZ meeting on…February. Hard to see the Bank of Canada delivering drama for CAD today, which has had its eyes on weak risk sentiment and very weak crude oil prices this week.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURNOK bashing on the top-side of the range since the pandemic outbreak wipeout and EURSEK leaning back higher on weak broad risk sentiment as well.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1500 - Bank of Canada meeting
  • 2000 – US Oct. Consumer Credit
  • 2130 – Brazil Selic Rate Announcement
  • 0001 – UK Nov. RICS House Price Balance
  • 0030 – Australia Oct. Trade Balance


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