Written by Convera’s Market Insights team
Jobs data revisions in spotlight
George Vessey – Lead FX Strategist
The US dollar index continues to trend south, hovering near its lowest level so far this year, whilst US equities ended their longest daily winning streak of 2024 as traders await a fresh catalyst to drive price action. The Bureau of Labour Statistics releases provisional benchmark revisions to the US employment report today, which could just be that trigger. We’re also keeping a close eye on the Federal Reserve (Fed) minutes from its July meeting.
Improved investor sentiment following last week’s positive economic data, coupled with bets for more than three quarter points of interest-rate cuts from the Fed this year, have boosted bullish flows. Can this positive tone be maintained, or will it be tested today? Traders are bracing for the annual benchmark revision to non-farm payrolls, which is expected to be significantly downgraded. This could prompt traders to price in more rate cuts and bid up bonds, whilst keeping the US dollar under pressure. But if it paints a particularly grim reading of the US labour market, enough to taint risk sentiment, perhaps the dollar might find support from haven demand.
Alternatively, if the revision comes in less than expected, it may result in traders pushing back on aggressive rate cuts as soon as September, hitting risk appetite and again offering the dollar some much-needed support. Either way, we could witness a knee-jerk reaction to the data sparking broader market volatility. Still, we think the any attempt by the dollar to recoup losses could be limited and a downside bias remains more compelling for now.
Canadian dollar advances despite soft CPI
Ruta Prieskienyte – Lead FX Strategist
The Canadian dollar strengthened toward C$1.36, reaching a near six-week high, as US dollar weakness overshadowed domestic data that supports a dovish stance from the Bank of Canada.
Canada’s annual inflation rate fell to 2.5% in July, down from 2.7% the previous month, in line with market expectations, marking the softest increase in consumer prices since March 2021. This result aligns with the Bank of Canada’s forecasts that inflation would drop toward the 2.5% mark in the second half of 2024. Inflation decelerated for shelter, driven by a broad-based decline in electricity costs, mortgage rates, and rent, and slowed slightly for food. The closely watched median and trimmed-mean core rates were below expectations at 2.4% and 2.7%, respectively, further reinforcing dovish expectations for the BoC. The yield on Canada’s 10-year government bond fell to 3.01%, nearing the one-year low of 3.02% reached on August 14th, in tandem with the decline in US Treasury yields. The market is pricing in 76 basis points of easing by the December 2024 meeting, implying back-to-back cuts are expected following the start of the BoC’s cutting cycle in June.
Technical analysis indicates that USD/CAD is currently hovering above its 50-week SMA around the $1.36 level, ahead of today’s US jobs revisions data. If there is a significant downward revision, suggesting that the US labour market is softer than previously thought, the Loonie could commence its advance and potentially test the May high.
Euro climbs above $1.11
Ruta Prieskienyte – Lead FX Strategist
The Euro strengthened above $1.11, marking a fresh high for 2024, as growing anticipation of a Fed rate cut continues to pressure the dollar. The pair may continue to gain further in the short term if the prospect of cuts to the federal funds rate keeps global equity markets rising and volatility declining ahead of the Jackson Hole conference, despite momentum indicators flashing overbought. Bunds gained while European stocks declined marginally during Tuesday’s session, breaking a streak of six consecutive gains.
Sweden’s Riksbank cut its policy rate for the second time this year to 3.5% and indicated it could cut rates a further two or three times before year-end, which is one more than it had proposed in June. This refreshed forward guidance aligns more closely with current market expectations, which, at the time of writing, had 78 basis points priced into the OIS curve.
Elsewhere, ECB’s Olli Rehn was among the first Governing Council members to acknowledge the shifting balance of risks to the Eurozone outlook. At an event on Monday, the policymaker stated that the recent increase in negative growth risks in the euro area has strengthened the case for a rate cut at the next ECB monetary policy meeting in September—provided that disinflation is indeed on track. Despite Rehn’s dovish comments, the momentum is currently with EUR/USD. The common currency has gained in seven of the last eight trading sessions, and the one-month risk reversal—the price of a EUR/USD call option over an equivalent put option—is the most bullish since March 2022. Positioning in the pair now appears to be around flat, indicating that investors are waiting for the next significant development.
Gold prints a fresh all time high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: August 19-23
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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.
