News & Analysis


The pound notched gains of 0.69% in yesterday’s session as it rallied along with other currencies that have cheap valuations following dire year-to-date performances. Sitting at fresh one-month highs against the dollar, further upside in this environment may be limited by a more dovish Bank of England on Thursday. Ahead of then, the pound trades roughly lower with other pro-cyclical currencies as the risk backdrop deteriorates slightly due to events in Taiwan.


The single currency continues to lag the broader rally in pro-cyclical G10 assets due to the weak euro-area growth backdrop. Despite rallying close to half a percentage point in yesterday’s session, the single currency remained in recent ranges, albeit it to the top end. This morning, as risk conditions deteriorate somewhat, the euro has retraced back towards its latest anchoring point, with little scheduled in the data calendar for the remainder of the day.


The dollar started August in the same vein it ended July; lower. With US rates markets still struggling to rebound to levels seen prior to last week’s Fed meeting, risk assets continued to strengthen despite the slower global growth backdrop. The release of the latest ISM data from the US didn’t help the greenback either. With the Fed expanding its reaction function to consider growth conditions, negative economic activity readings out of the US are arguably not supportive for the dollar anymore, especially if they relate to an inability for firms to pass on higher costs. That was the case yesterday as the ISM manufacturing index not only fell from 52.0 to 52.8 in July, but the composition of the index was also weak. The employment index increased 2.6 points to 49.9 but remained slightly in contractionary territory, while production, news orders, and prices paid sub-indices all fell. Reflecting the weak consumer demand backdrop, the customer inventories index increased from 39.5 to 43.8. As measured by the DXY index, the greenback fell 0.4% on the day to sit at its lowest level since June 5th–the day where the US Treasury curve inverted and sparked a substantial risk-off rally in the dollar. Today, with geopolitical tensions elevated as US House of Representatives Speaker Nancy Pelosi visits Taiwan, leading China to conduct military operations in the Taiwan strait, the dollar sits broadly higher against most G10 currencies, with just the Japanese yen trading higher on regional haven flows.


As mentioned in yesterday’s morning report, we expect the performance of the Canadian dollar year-to-date and its economic integration with the US economy to restricted its upside against the dollar in the current environment. Yesterday’s price action is testament of this, as weaker US growth data via the ISM manufacturing index and construction expenditure measure saw the Canadian dollar buck the general G10 trend and weaken along with US equities. Today, the loonie re-joins the broader G10 move, however, as risk conditions turn unfavourable for higher beta currencies.

FX Elsewhere

The Australian dollar collapsed overnight despite the Reserve Bank of Australia meeting expectations with a 50 basis point hike. This was largely due the inclusion of the phrase “policy is not on a pre-set path” in the rate statement, which suggests there remains two-way risk to the Aussie rate path, while there was also less concerning language around the inflation outlook that suggests jumbo rate hikes are no longer on the table. Compounding the Aussie’s decline was the deterioration in risk conditions, especially in the APAC region. AUDJPY, a key global risk proxy, trades close to 2% lower on the overnight developments.



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