CAD
While Friday’s Canadian jobs report is the key domestic event of note, until then, cross-asset dynamics are likely to be in the driving seat for USDCAD. On this point, neither of the loonie’s two key drivers look likely to be supportive today. Oil is down close to 1% so far this morning, while the slide in Asian equities overnight points to another risk-off session for both Europe and North America, with both dynamics signalling an extension higher for USDCAD – one that could put 1.40 in play this week if sustained.
USD
After Fed Chair Powell placed the labour market in the spotlight, a series of weak leading indicators combined with last Friday’s jobs report delivered a damning verdict. All softened more than expected, triggering fears that the Fed has kept policy too tight for too long, setting off a panic across markets. This dynamic saw the broad dollar shed more than 1% to end last week, as markets ramped up Fed easing bets from three to five cuts projected for the remainder of 2024. That said, we doubt this dollar weakness is likely to be a durable theme. The market-implied path for cuts looks too aggressive to us, absent recession risks – and in our view last week’s data, while disappointing, is not signalling that kind of slowdown just yet. Most likely then, traders will ultimately trim their Fed easing expectations, with higher expected rates supporting the greenback in the medium term. Even so, if a recession is truly on the cards in the US, we would still expect to see the dollar rally on a haven bid. Indeed, this looks set to be the key dollar dynamic today. Market turmoil and a sharp uptick in cross-asset volatility should see traders headed for the safety of US assets, with haven dynamics supporting a retracement higher for the dollar this morning. How far this extends is likely to depend on equities following a grim Asian session (see below) and on the ISM services PMIs this afternoon, with particularly close attention paid to the employment indicators after the counterpart manufacturing print dropped off a cliff last week.
JPY
Asian markets have grabbed the attention to start the week, none more so than in Japan where the Nikkei fell by -12.4% this morning. That said, while the standout move was in equities, USDJPY also took a notable leg lower, sinking a further 2.5% so far, driven by a combination of carry trade unwinds, haven dynamics, and we suspect some speculative positioning too. All told this leaves USDJPY down almost 12% in less than a month. The yen’s rally poses a challenge for the BoJ, with a stronger yen set to weigh on inflation. With this in mind, we will be keeping a close eye on Japanese officials to see if their intervention bias against rapid yen moves is two-sided.
EUR
Industrial production and labour market data are the main data points this week for the eurozone, not least with Governing Council having now headed off on summer holidays. That said, it is risk conditions and the escalation of conflict in the Middle East that should be front of mind for euro traders this week, a backdrop that is likely to see EURUSD downside, even as the euro rallies against other more risk-sensitive currencies.
GBP
A quieter time should have been in store for the pound this week, with no central bank speakers scheduled and only a handful of second-tier data prints set for release. However, the focus for sterling traders is instead likely to be on broad risk conditions as US recession worries grip markets, a scenario that is likely to see GBPUSD slide, with the pair having shed 0.2% so far this morning already.
This content was originally published by our partners at Monex Canada.