Market Brief: Dollar loses momentum on fading geopolitical risks, Canadian dollar leaps on strong jobs

A nascent recovery in the dollar is stalling out this morning as geopolitical risks in the Middle East, Japan, and the euro area show signs of easing. The greenback is down -0.2 percent against a basket of its major counterparts, Treasury yields are edging lower, and US equity indices are setting up for a modestly-positive open. Oil prices are slipping as markets remain oversupplied and risk premia evaporate in the face of a potential peace agreement between Israel and Hamas, and terms of trade indices—which measure the ratio of export prices to import prices—are turning against the US dollar. The shale-driven emergence of the US as a major global energy producer has led to an increasingly-positive correlation between the dollar and oil prices in recent years, reversing decades in which the opposite dynamic held.

The Canadian dollar is surging after the economy generated far more jobs than anticipated last month, lowering market expectations for a rate cut at the Bank of Canada’s late-October meeting. A net 60,400 new positions were added in September, according to an update published by Statistics Canada this morning, with -45,600 lost in part-time work against an astonishing 106,100-role gain in full-time. Total hours worked were up 1 percent year-over-year, slipping -0.2 percent in the month, and the average hourly wage for permanent employees—closely watched by monetary policymakers—held steady at 3.6 percent from a year earlier, matching market expectations.

Countering our own projections, trade-sensitive manufacturing industries added 28,000 roles in the month, the public sector grew by another 31,000, and the health care and social assistance, and agriculture sectors brought up the rear with 14,000 and 13,000 jobs gained, respectively. 21,000 jobs were shed in the domestic demand-driven wholesale and retail trade categories.

The loonie is back to trading above its 200-day moving average in the high 1.30’s, and odds on a cut at the Bank of Canada’s October 28 decision have plunged to less than 20 percent from nearly 60 percent ahead of the release. Today’s data has, admittedly, made it much more difficult to justify easing policy further at the end of the month, but we’re not sure how long this will hold: Canada’s unemployment rate has risen by more than any of its major advanced-economy peers in this cycle, and demand-driven inflation pressures seem largely quiescent. We still think a cut is coming, but December or January now seem more likely.

The yen is trading on a stronger footing after the ruling coalition supporting the Liberal Democratic Party fell apart, further reducing presumptive incoming prime minister Sanae Takaichi’s capacity for unleashing significant fiscal and monetary stimulus. Negotiations between Takaichi and long-standing junior coalition partner Komeito collapsed last night, with a disagreement over political funding laws apparently at fault. Without Komeito’s support, Takaichi could fail to garner the votes needed to become prime minister, and might be forced to call an early election, making swift and substantive policy pivots unlikely. Takaichi yesterday said “I have no intention of triggering an excessively weak yen,” before noting that the currency’s decline had both negative and positive aspects, suggesting that the exchange rate might help provide a “buffer” for Japan’s export-focussed companies. When asked if she still thought the Bank of Japan’s rate cuts were “stupid”—her criticism a year ago—she demurred, saying “Please stop bringing that up. I know I’m not in a position to comment on a rate increase”.

French president Emmanuel Macron is expected to name a new prime minister today, and reports are emerging of a thawing in relations between some of the major parties that could pave the way for the formation of a new cabinet—a step that might forestall the need for new elections and make passing a much-needed budget slightly easier. According to Bloomberg and Reuters, outgoing prime minister Sebastien Lecornu has had some success in bringing centrist leaders back to the bargaining table in recent days, prompting him to say “there are possibilities for a compromise” in an interview on France 2 television last night. The spread between French and German bonds is easing from recent highs, and the euro is holding firm above key psychological support levels.

The British pound, in contrast, is back on the defensive as traders brace for another round of relatively-negative labour market data next week. The doves on the Bank of England’s rate-setting committee could see their numbers rise if Tuesday’s report brings confirmation of a further easing in wage pressures and overall labour demand, and after a brief foray into positive territory, three-month risk reversals—which measure the cost of protection against positive and negative moves in currency markets—are again skewed to the downside, suggesting that participants see the dollar outperforming in the near term.

Please note: We are off on Monday for the holiday, and will be back in your inboxes on Tuesday. Enjoy the weekend!

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