News & Analysis


Following a fairly uneventful session in markets yesterday, the pound leads gains within the G10 space this morning after September’s labour market report printed in a strong fashion and sets up a rate hike from the Bank of England as early as December. Although the data doesn’t directly show the labour market after the Furlough scheme ended on September 30th, it points towards a robust environment ahead of the transition. Job gains in September alone were estimated at 213,000, with the unemployment rate falling below its 3-month average of 4.3% to 4%. Additionally, real-time PAYE data showed continuing employment gains in October, but not such a large gain that raises concerns over a wave of redundancies towards the end of September. Meanwhile, the number of job vacancies continues to rise to record highs in the 3-months to October, highlighting that any increase in labour market slack should be quickly absorbed. While the Bank is largely awaiting the October data, which is released on December 14th, today’s report suggests that a large spike in the unemployment rate post-furlough is unlikely. The emphasis now shifts to the CPI data on Wednesday and retail sales on Friday, which together could extend sterling’s gains further if they alleviate fears that the economy is stuck in a low growth environment.


While the dollar saw modest broad-based strength yesterday afternoon, losses among the G10 were most prominent in the euro given the currency’s sensitivity to the steepening of the US Treasury curve. This led to EURUSD falling to fresh 16-month lows while losses among other G10 peers were much more limited. From the euro side, dovish comments from European Central bank President Christine Lagarde also weighed on the pair as she stated “trimming financial facilities would do more harm than good” and underpinned the idea that a 2022 rate hike is unlikely. The market implied probability rate closed the day moderately lower compared to last week as a result, although renewed Covid restrictions throughout Europe may also be weighing on market bets of tightening in the short-term. Today’s Q3 GDP and employment readings at 10:00 GMT will provide more insight on how the economy has fared over summer amid the supply constraints but ahead of the renewed restrictions.


The DXY index was supported by bear steepening in the Treasury curve yesterday as the spread between the 2-year and 10-year yield widened by nearly 5bps as the US 10-year broke through 1.6% for the first time since November’s Fed meeting. The leg higher in the DXY index was largely driven by a stronger dollar in yield sensitive G10 pairs, namely EURUSD and USDJPY, but with the Treasury curve flattening this morning, the dollar is retracing at the margin. Yesterday’s main stories centred around the signing of the $1trn infrastructure spending bill into legislation, which we don’t view as being too instrumental in market pricing given the news was largely priced in ahead of time, and the 3-hour long video conference between President Biden and President Xi Jinping. The open dialogue between the two leaders comes shortly after the Pentagon released its China Military Power Report, which envisages a quadrupling of China’s nuclear capabilities from now until the end of the decade, and rising geopolitical tensions across the globe. While the seemingly successful conversation which led to no significant announcements may have taken some risk off the table for markets, the reaction in haven securities is limited when analysing the past 12 hours.  Today, the focus for the dollar will shift from events in Washington back to the data calendar, with October’s retail sales data released at 13:30 GMT. Headline retail sales are expected to grow at a rate of 1.5% in October, the fastest pace of expansion since March when the stimulus cheques boosted consumption.


The loonie was one of the few G10 currencies which rallied against the US dollar in yesterday’s session despite oil markets spending much of the session under pressure from signs that President Biden would use Strategic Petroleum Reserves to lower US gasoline prices. Outside of the oil space, front-end yield spreads widened slightly in favour of Canadian rates following consecutive weeks of narrowing as US rates climbed higher after the record CPI release. This supported the loonie along with signs from China that economic activity remains robust, which painted a constructive picture for commodity demand in the coming months. Meanwhile, domestically housing data out of Canada showed the first signs of increased demand since October 2020 as home sales surged 8.6% MoM in October. Should demand continue to be robust in Canada’s housing sector, the Bank of Canada will likely be forced into tightening policy further in order to contain house price growth spiralling out of control. Today, the data docket is light in Canada with just housing starts for October released at 13:15 GMT. Much of the focus will be on US retail sales for the USDCAD pair ahead of Canada’s CPI release for October tomorrow.



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