USD
Wednesday was all about the dollar for FX traders, with payroll revisions and FOMC meeting minutes set to be published. In the case of the former, payroll revisions were unusually large, subtracting -818k from estimates of the number of jobs added to the US economy in the year to March. The Fed minutes, meanwhile, indicated that there was an active discussion around cutting rates by 25bp in July, before ultimately settling for a hold, while a September cut has the support of most FOMC members. All told, this left markets to trade a set of dovish-sounding headlines, seeing a further pullback in the dollar yesterday.
Even so, we think this is the wrong read-through, on both counts. The downward payroll revisions make the recent slowdown in nonfarm prints look much less alarming, while also suggesting that productivity gains were much better than expected, both of which should be dollar-bullish. In addition, the FOMC minutes failed to note any discussion of moving in larger increments between now and year-end, making market pricing for between one and two 50bp cuts in the space of three meetings look wildly optimistic to us. We think this latter point should garner some attention from Fed officials at Jackson Hole, which kicks off in earnest tomorrow, helping to unwind some of the greenback’s recent weakness if we are correct.
EUR
PMIs and Q2 negotiated wages are the focus for euro traders today. Regarding PMIs, market expectations look for a composite eurozone print of just 50.1, indicating expansion for private sector activity by the barest of margins in August. Even so, we think this might be overly optimistic, seeing risks to today’s print as skewed to the downside. Specifically, seasonal adjustments should be a drag on H2 prints, meaning we would not be surprised to see the eurozone economy fall into contraction in today’s readings. The one counterpoint to this view is Olympic effects, which likely supported strong services activity in France.
Negotiated wages, should similarly point to a slowing in the eurozone. If we are right, this will leave little evidence to steer the ECB away from cutting rates in September. All together then, with rate expectations likely to stay unmoved today, and growth looking weak, this is a backdrop that should see the euro trading weaker ahead of ECB Chief Economist Lane speaking in Jackson Holes over the weekend.
GBP
While eurozone PMIs should print soft later today, we expect the counterpart UK print to continue signalling outperformance. This should see modest upside for the pound before BoE Governor Bailey speaks tomorrow afternoon, with his speech likely to hold significant weight for the short-term path for Bank Rate expectations given the lack of further detail following this month’s policy meeting.
CAD
While USDCAD took yet another leg lower yesterday, we see upside risks for the loonie building. Chief amongst these are the rail strikes that began in Canada overnight. This marks the first time that both major freight rail companies have seen simultaneous lockouts, with this bringing the entire Canadian freight rail system to a grinding halt. Our base case for now is that a resolution between the rail freight companies and unions is reached in the coming days, an outcome that should mean only limited economic impact. But, if the dispute drags on, then disruption to the Canadian economy will be highly non-linear, getting progressively more severe over time. The worst-case scenario would see a spike in inflation that requires rate hikes from the BoC, even as the economy drops into recession. While a tail risk for now, absent any deal being reached we think markets begin to price in these risks in the coming days – a dynamic that we expect to weigh on the loonie, perhaps as soon as today.