Sensitivity to growth headlines increases
Kevin Ford
Jobless claims data, which saw a significant jump last week to the highest level in nearly four years, is making markets more sensitive to the narrative of a slowing economy rather than ongoing inflation. This increase in unemployment benefit applications signals that layoffs may be rising and hiring is slowing down.
August’s Consumer Price Index (CPI) report showed persistent inflation. The headline CPI rose 0.4% month-to-moth, slightly above expectations, driven mainly by shelter and food costs. Core CPI, which excludes food and energy, was in line with forecasts at 0.3%. However, several components within this index saw notable increases, including apparel, new vehicles, and airline fares. Despite these gains, the core goods index (excluding vehicles) showed a second consecutive month of deceleration, hinting at a potential slowdown in price increases for some consumer products.
Following the data release, the market’s reaction was revealing. Bonds rallied and the U.S. Dollar Index weakened, reflecting the view that the in-line core inflation figure gives the Federal Reserve room to consider a rate cut. The market has now fully priced in three rate cuts by the end of the year. This indicates a clear shift in the market’s focus from the ongoing inflation story to a growing belief that the economy is slowing down and the Fed could become less hawkish.
On low vol, CAD’s underperformance streak continues
Kevin Ford
No signs of volatility in FX, much less in the Canadian dollar. With few catalysts and a recent weak jobs report, the Canadian dollar has shown little volatility, though it has remained vulnerable to U.S. dollar upticks ahead of today’s inflation data. After falling as low as 1.378 this week, recent upward pressure has lifted it above 1.385, putting it back above its 20, 40, and 60-day moving averages. Since August, the CAD has underperformed all G10 currencies, which have benefited from renewed U.S. dollar weakness. The Loonie has traded within a range of 1.37 to 1.39, and even with a weaker dollar after today’s US CPI the CAD has stayed trading above 1.385.
The Loonie could be exposed next week, if the upcoming BoC decision and press conference are perceived as more dovish than the Federal Reserve’s decision. Before that, Canadian CPI inflation data will provide a clearer picture of how much flexibility BoC Governor Tiff Macklem has to set a monetary policy path that aligns with recent weak macro data.
Risk sentiment buoys sterling
George Vessey
With few domestic catalysts, sterling continues to ride global risk sentiment as investors cheer prospects of Fed rate cuts. Gilt auctions have gone smoothly though this week, suggesting the UK can service its debt at the right price – helping calm nerves around elevated long-end yields.
Still, sterling remains caught between short-term optimism and deeper macro fragility. GBP/USD rebounded from fiscal-driven lows near $1.3333 last week, briefly testing $1.36 before reversing. The move was undermined by rising oil prices and wavering risk appetite amid renewed geopolitical tensions. However, soft U.S. PPI data reignited Fed easing bets, helping keep GBP/USD above $1.35. Technicals show neutral momentum, leaving room for further upside, but positioning data reveals a build-up in bearish GBP bets that price action has yet to reflect.
The UK’s stagflationary backdrop – marked by weak growth, sticky inflation, and fiscal uncertainty – continues to cap sterling’s appeal, even with its high-yield status. This dynamic is evident in GBP/EUR, which remains stuck below €1.16 and over 4% lower year-to-date despite recent BoE hawkish repricing.
MXN close to 2025 highs
Kevin Ford
Mexico’s government has submitted its 2026 budget proposal, which includes a plan to raise tariffs on over 1,400 products from countries with which it does not have a free trade agreement. This measure, which is expected to be approved due to the ruling party’s majority in Congress, is aimed at boosting national production and consumption while reducing trade deficits. The new tariffs, which range from 10% to 50% on goods across various sectors including steel, textiles, plastics, and automotive parts, are primarily targeted at imports from Asian nations, particularly China.
This policy shift aligns with the “North America Fortress” idea, a strategic economic alliance among the US, Mexico, and Canada to strengthen regional supply chains and manufacturing. This move could not only protect Mexican domestic industries from foreign competition but also bolster Mexico’s role as a critical partner in the North American trade relationship. The budget proposal also aims to reduce the fiscal deficit, signaling a commitment to sound economic management.
The Mexican Peso continues to demonstrate strength, with year-to-date gains nearing 12% against the U.S. dollar, and notably, two-thirds of that appreciation (roughly 8%) has occurred since “Liberation Day.” This resilience, which has made it one of the top-performing emerging market currencies, can be attributed to several key factors including high-carry, stable macro environment and bid for Emerging Markets assets.
CAD and AUD split paths versus the pound
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: September 8-12
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
