Market Brief: Dollar steamrolls global markets

The almighty greenback is holding near its highest levels since March this morning as rising oil prices and slower disinflation fears force Treasury yields upward. The major North American equity bourses are under pressure and risk-sensitive currencies are licking their wounds. 

Half-hearted defence efforts from policymakers are doing little to reverse the tide. The euro is up just 0.2 percent after European Central Bank Governing Council member Klaas Knot warned markets could be “underestimating” the likelihood of a rate hike at next week’s meeting, and his colleague Peter Kazimir said he would prefer to “deliver another 25 basis points” and “take a breather thereafter”. Both the onshore and offshore Chinese yuan are trading north of the 7.30 mark even after the official renminbi fix was set well above market consensus last night. And the yen is trading essentially flat despite Japanese vice finance minister Masato Kanda’s warning that the government wouldn’t rule out any options in dealing with “speculative action” in the foreign exchange markets - language that has historically preceded direct currency intervention. 

The Canadian dollar remains soft as markets prepare to ignore the Bank of Canada’s “higher for longer” message in a few hours. With the economy slowing, labour market conditions easing, and other portents suggesting that inflation pressures will subside in coming months, investors are growing more convinced the Bank’s tightening cycle is done, and are now mainly concerned with adjusting bets on when the first rate cut might occur. 

Crude oil prices remain near the highest levels since last November after both Saudi Arabia and Russia said they would extend production cuts to the end of the year. In yesterday’s clearly-coordinated announcements, Riyadh and Moscow warned that they would keep a combined 1.3 million barrels a day in output off global markets till December, surprising participants who had expected a one-month rollover in supply restrictions. Although both global benchmarks have slipped somewhat, Brent is going for almost $90 a barrel, while West Texas Intermediate is exchanging hands for $86. 

Against this backdrop, a kind of “doom loop” threatens to unfold in global markets, with higher oil prices forcing the Chinese, Japanese, and European economies further into remission, further burnishing the largely energy-independent US economy’s safe haven credentials. The dollar could continue its rally, putting renewed pressure on trade volumes and asset prices in the rest of the world. 

We think US economic surprise indices will continue softening incoming weeks, with consumer spending and labour market data series underperforming more profoundly relative to overly-optimistic market expectations. If we’re right, the “American exceptionalism” trade should falter, sending the greenback lower on a broad-based basis and offering global asset prices a modest degree of relief. But we could be wrong - and even if we aren’t, volatility levels seem likely to rise. 

Still Ahead

TODAY

Bank of England Governor Bailey and three of his colleagues will deliver testimony in front of the Treasury Select Committee, with elevated wage growth likely to feature as a key vector of questioning ahead of the September 21 rate decision. (9:15 EDT)

The Bank of Canada is almost-universally expected to maintain its benchmark rate at 5 percent, responding to signs of cooling economic activity and easing price pressures in electing to stay on the sidelines. Policymakers could try to embed a relatively-hawkish message in the statement-only decision, but markets are prepared to ignore this after a series of recent data releases surprised to the downside. Odds on another rate hike in this cycle have plunged in the last week, with traders beginning to prepare for a cut as early as January 2024. (10:00 EDT)

The Institute for Supply Management's services index is expected to inch lower, moving down to 52.5 in August from 52.7 a month earlier. (10:00 EDT)

The Fed’s Beige Book survey of anecdotal economic commentary should follow a raft of recent earnings calls in pointing to a softening in consumer spending. (14:00 EDT)

THURSDAY

Governor Tiff Macklem will deliver the Bank of Canada’s latest Economic Progress Report in Calgary, helping shed light on the thinking behind Wednesday’s rate decision. We think he will follow in Jerome Powell’s footsteps, arguing that - although signs of slowing economic momentum and disinflationary forces are everywhere - real rates should remain elevated until price pressures have been decisively defeated (text published at 13:55 EDT, press conference follows the speech). 

A flock of Fed officials, including Raphael Bostic, Lorie Logan, and John Williams will speak through the day.

FRIDAY

Statistics Canada is expected to report a modest rebound in employment numbers, with roughly 15,000 jobs added in August. The unemployment rate - a function of population growth and labour demand - could climb for a fourth month, further reinforcing perceptions of a Canadian economy that is gearing down as the private sector’s debt servicing costs ratchet ever higher. (08:30 EDT)

See our Economic Calendar for a more complete listing of upcoming data releases.