The dollar eases despite a risk off tone
The dollar softened as Treasury yields posted their largest daily decline since March 2023, while investors focused on PMI data and expectations for a December Fed rate hike.
USD
The dollar again failed to attract much of a haven bid on Thursday despite a sharp deterioration in risk appetite. Fresh doubts over AI financing, triggered by Meta’s capex guidance, dragged the Nasdaq 2.6% lower, though the bigger story was in Treasuries, where 10-year yields fell 17bp to 4.96%, the largest one-day drop since March 2023, as investors pared Fed hike bets. With yields falling, the DXY slipped to 101.65, its weakest level this month, with the yen and franc the main beneficiaries. But as we flagged yesterday, we think dollar losses should remain modest with the FOMC in blackout ahead of Wednesday’s decision, while jobless claims of 194k point to a still-tight labour market. Flash PMIs at 14:45 BST and final Michigan sentiment at 15:00 BST are today’s focus, with a December hike now priced at closer to 90%.
EUR
The euro lagged again on Thursday, closing flat even as the dollar softened elsewhere, with France still the drag. The 10-year OAT yield held above 5%, a level last seen in 2002, with the Bund spread now north of 180bps and US 10-year yields now below French equivalents for the first time in thirteen years. Against this backdrop, EURGBP continues to sit just below 0.84 near 17-month lows, consistent with our preference for fading euro rallies. Today brings another test of eurozone resilience in the October flash PMIs, with the bloc-wide print at 09:00 BST. Consensus looks for the eurozone composite to ease to 52.7 from 53.1, but with France expected to flirt with contraction amid street unrest and fiscal paralysis, and Brent above $110 adding to input costs, we think risks skew to the downside. The ECB’s consumer expectations survey at 10:00 BST matters too, with the 1-year measure seen rising to 3.2% ahead of next Thursday’s meeting, where a hold at 2.50% is widely expected. Moody’s reviews France’s Aa3 rating after the close. We continue to favour near-term euro downside, with 1.11 the key level.
GBP
Sterling was again among the more resilient majors on Thursday, although Middle East headlines and Treasury-led risk aversion still saw cable finishing the day below 1.34. This morning’s retail sales, however, hinted that consumers are feeling the squeeze from fuel prices running almost 30% higher than a year ago. Volumes fell 0.4% MoM in September against expectations for a 0.1% decline, with annual growth slowing to 0.8%, although an upward revision to August softened the blow. Attention now turns to the flash PMIs at 09:30 BST, where consensus looks for the composite to ease to 51.7 from 52.0. With the Chancellor’s first Budget due next Wednesday, we still see sterling risks skewed to the downside into month-end.
CAD
The loonie extended its winning streak to six sessions on Thursday, with USDCAD slipping to near 1.40, its lowest since late September. Two factors drove the move. First, the Treasury rally compressed the US-Canada spread, eroding the dollar’s rate advantage. Second, oil rallied as Iran’s claimed tanker strikes near Hormuz and Houthi attacks on Saudi infrastructure renewed oil supply fears, lifting WTI back towards $100 and Brent to $113. Even so, we think the loonie’s rally is on borrowed time. Granted, markets price a 90% chance that the Bank of Canada hikes to 2.50% on Wednesday, but we still expect a hold given soft underlying inflation, with the Bank’s preferred core measures averaging just 1.85%, two consecutive monthly job losses totalling over 110k, and a trade conflict the Governor says could halve Q4 growth. August retail sales at 13:30 BST are expected to rebound 1.3% MoM after July’s 0.7% fall, offering some near-term cover. But assuming rate hike bets are pared back from here, we continue to look for USDCAD to drift higher.