CAD
The BoC’s Wednesday meeting is the main event this week for loonie traders. Sell-side consensus expects to see a 50bp cut by a 2-1 margin, while swap markets assign this outcome at a 90% likelihood. In large part, this is a function of Friday’s jobs data, which showed the Canadian unemployment rate jumping from 6.5% to 6.8%, while permanent hourly wage growth sank from 4.9% to 3.9% YoY. Granted this is concerning, but it also overlooks the fact that net change in employment was 50.5k in November, double market expectations, even as government stimulus ahead of the holidays is set to juice economic activity into year-end. We think this should warrant a degree of caution from the Governing Council. Our base case remains a 25bp cut, albeit this will likely need market expectations to move in our favour this week in order to be realised.
USD
An initial knee-jerk sell-off proved short-lived for the dollar post-payrolls, with the details of Friday’s jobs report proving more hawkish than initial headline readings suggested. Specifically, while a modest NFP beat largely netted out with a 0.1pp uptick in the unemployment rate, at least in our eyes, the 0.4% MoM average hourly earnings growth seen in November stood out. This leaves annual hourly earnings growth tracking at 4.0% YoY, a rate that is too high to be consistent with the Fed’s 2.0% inflation target based on historical relationships. Moreover, if this is married to an inflation print this week that shows disinflation progress continuing to stall, we think it should leave a Fed hold the base case ahead of this month’s FOM meeting. Admittedly, that would be at odds with current market pricing, which currently ascribed just a 15% chance to this outcome. But we think this is too low, a point we suspect will start to be made more vociferously by Fed speakers in the coming days, leaving risks skewed in favour of a move higher for the dollar this week.
EUR
While markets continue to digest Friday’s payrolls, news from China is helping to support risk conditions this morning, with the euro seeing the benefit. Specifically, the Politburo has pledged more active stimulus measures, and moderately looser monetary policy. While still far from sufficient to solve China’s deep structural issues, it is nevertheless a boost to demand which should be supportive of growth-sensitive FX. That has been enough to offset jitters on events over the weekend, enough to see EURUSD just about nudging into positive territory. Later this week, the ECB should be front of mind for euro traders, albeit with a 25bp rate cut looking like a done deal, focus is likely to be skewed towards any forward guidance on offer.
GBP
Sterling should take a back seat this week, with minimal domestic data prints due for release, and the BoE’s last meeting of the year still almost 2 weeks away. That said, price action this morning had been a little surprising, with the pound seeing tailwinds from headline out of China, while showing little reaction to the REC report of jobs published just after midnight. The latter point is notable given the BoE’s emphasis on the report in the absence of good official data on the labour market – especially with these latest REC readings showing a softening in labour market conditions. To us that leaves sterling looking a little strong on a tactical basis.
This content was originally published by our partners at Monex Canada.