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The daily interaction between the USD and yields is proving to be rather unpredictable. In previous discussions, I've highlighted the USD's inability to fully capitalize on previous increases in US yields, often attributing this to diminished expectations of Federal Reserve interest rate hikes or sporadic surges of risk appetite in the equity markets. Notably, on Monday, the USD weakened alongside a drop in yields, indicating a predisposition to react more to declining yields than rising ones. This suggests a potential exhaustion of the bullish trend the USD experienced in July.
Surprisingly, over the past 24 hours, the USD managed to reverse its Monday losses without much assistance from US yields, which remained relatively stable. In hindsight, the explanation for this morning's rebound is being linked to weaker equities, which have driven investors toward the safe-haven USD, despite some positive local economic data favouring "risk-on" currencies like the AUD. The complex interplay between yields, risk sentiment, and the USD is proving to be quite capricious. Thus, it is essential to look beyond the day-to-day noise, even in my daily reports, and emphasize that the theme of US exceptionalism that fuelled the USD rally is still at play.
In more positive news, the Eurozone received better-than-expected data this morning, as Germany's IFO index exceeded consensus expectations. The headline IFO, along with its current assessment and expectations components, all showed improvement compared to September and surpassed consensus estimates. This contrasts with yesterday's flash PMI data, particularly for the services sector, which indicated a decline. The services PMI dropped to 48.0 from 50.3, but the services component of the IFO improved to -1.5 from -4.9. While the data suggested a gloomy outlook for Germany's economy yesterday, the head of the IFO institute today expressed a more optimistic outlook, saying, "Germany's economy can see a silver lining ahead." Nonetheless, the October improvement is the first rise in the headline IFO index since April, so celebrations should be tempered. The data still implies a contraction in GDP, with hopes resting on the possibility of growth stabilization. In contrast, the US Q3 GDP report, due tonight, is expected to show 4.5% annualized growth. As a result of these developments, EUR-USD extended its decline this morning.
As expected, they’ve paused the rates, if we look at BoC they do have room to maintain its policy rate unchanged due to slowing consumer demand, signs of a softening labour market, and ongoing adjustments in the housing sector. However, the presence of elevated inflation expectations and underlying price pressures might justify a rate hike in the coming meetings. HSBC economists anticipate that the lack of clarity regarding whether monetary policy is sufficiently restrictive to curb inflation will lead to the bank maintaining the status quo, but the overall tone is likely to remain hawkish forward from here. Currently, USD-CAD seems to be influenced more by the "risk-off" sentiment in global equity markets and the recent decline in oil prices this week.
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