News & Analysis


Sterling remains on the defensive this morning, as the UK Government continues to attempt to balance economic losses against controlling the ongoing covid-19 pandemic. In addition to pre-emptive leaks and briefings to the media over recent days, Boris Johnson outlined plans in Parliament yesterday, and made a televised address, warning that further measures may be necessary if those taken this week are ineffective. This morning the Financial Times is reporting that Chancellor Rishi Sunak is drawing up plans for new wage subsidies to replace the outgoing furlough scheme, which ends in October. The measures could include partial subsidies aimed at encouraging companies to keep workers on reduced hours, a policy reminiscent of Germany’s very successful hours-reductions schemes during past recessions.  Bank of England Governor Andrew Bailey also attempted to add some perspective to the Bank of England’s discussions of negative interest rates yesterday, reiterating that the measure was being examined and should be in the Bank’s toolkit, but was not about to be implemented imminently. This morning’s data has included flash services and manufacturing purchasing managers’ indices for September, which showed reported output flat in both sectors.


The euro is enjoying a boost from risk-off flows for a fourth consecutive session and fell to a 2-month low against the dollar as concerns over renewed lockdowns globally continue to drive safe haven flows, while hawkish comments from Chicago Fed President Charles Evans also downward pressure to the pair Meanwhile, in the eurozone, European Central Bank economist Fabio Panetta said that providing too much stimulus is more preferable than providing too little, fueling expectations for further monetary stimulus in the near future and adding to the downward pressures the EURUSD was already witnessing. The comments came after Spain, France and the Netherlands continued to see record surges in virus cases as a second wave seems to have become reality. This morning’s Purchasing Managers’ Index releases from September confirmed the bleak picture of the eurozone current state, with the bloc’s services PMI dropping to 47.6 down from August’s  50.5, and the composite PMI falling to 50.1 down from 51.9. In Germany, the eurozone’s largest economy, the services PMI dropped below the contractionary mark as well and printed at 49.1 compared to the consensus of 53.0, while the composite figure dropped by slightly less and fell to 53.7 from 54.4 in August. Manufacturing indices rose in Germany, France and the eurozone, however. The fall the services index only confirms that winter is coming and a wine and dine with safe distances will no longer be possible when outside terraces close, and the service sector will bear the brunt of it all. Today, markets await another testimony from Federal Reserve Chairman Jerome Powell and PMI indices from the US in the afternoon, but the eurozone data calendar is blank for the remainder of the day.


The dollar continued its rally yesterday and overnight, as markets took comments from Federal Reserve policymaker Charles Evans as a hawkish signal. Speaking at a virtual panel discussion, Evans said that the Fed could “start raising rates before we start averaging 2%”, referring to one of the three conditions set by the Fed for raising interest rates. He also pointed out that rates could rise and policy would remain accommodative. The comments were merely highlighting logical implications of the Fed’s formal policy guidance, but markets nonetheless took them as hawkish, as their previous impression was that rates would remain at the effective lower bound until the new inflation target was met. Evans joined Fed Chair Jerome Powell, who was giving testimony to lawmakers, in warning of the serious need for further fiscal support for the US economy. Today, the dollar is enjoying a fresh source of stimulus stemming from risk-off traders seeking safety from tightening lockdown measures in Europe, and potentially Canada.


The loonie was thrown around by the broad G10 move yesterday but ultimately ended the session flat. However, with the dollar receiving another fresh boost from risk-off flows, USDCAD has resumed its climbs back up to levels not seen since August 12th this morning. The only Canadian specific news yesterday came from the Canadian Federation of Independent Business, who said only 29% of small-and-medium-sized companies surveyed had sales back to or better than previous levels. While this will come as little shock given that the recovery is in its premature stages of recovery, the stark reminder of how far the economy is from a full recovery comes at a time when Covid cases are resurging. Prime Minister Trudeau is set to address these concerns today with his speech from the throne as Parliament is set to reconvene. Facing a confidence vote too, Trudeau could be sent back to face the electorate this year, but given the public health crisis, it is unlikely he will lose today’s vote. Previously, the throne speech was going to be the platform to which another ambitious wave of fiscal spending would be announced, focused at green investment and stitching up the holes in the social security net. However, given the rise in case count, today’s speech will likely focus on the immediate task of flattening the Covid curve. Should further lockdown measures be implemented in response to the latest virus data, the focus will quickly shift onto the government’s plans to protect the economy in the near-term. Notably, questions will be asked of the administration’s plan to withdraw the Canada Economic Response Benefit scheme at the end of the week, which has, in essence, provided a universal basic income to the electorate during the first wave of lockdowns. With such a sizable event scheduled for today, the loonie’s focus will undoubtedly be on events taking place in Ottawa.

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