Good morning and happy Monday. Four major forces are acting on currency markets ahead of the North American open:

Last week’s flight to safety is losing momentum as world leaders make a concerted push to minimize spillover risks ahead of an expected Israeli ground invasion of Gaza. Both major oil benchmarks are giving back some of Friday’s gains, Treasury yields are renewing their push higher and equity futures are pointing to a softer open after US president Joe Biden said he supported efforts to eliminate the terrorists who attacked Israel, while noting that “Hamas and the extreme elements of Hamas don’t represent all the Palestinian people. And I think that… it would be a mistake… for Israel to occupy Gaza again”. The dollar is inching lower on hopes that a wider regional conflagration can be avoided, giving the pound and euro some much needed breathing room.

The Canadian dollar is stabilizing as oil prices steady, with this morning’s survey data and tomorrow’s inflation report looming as potential catalysts for bigger directional moves. The Bank of Canada’s closely-watched third-quarter Business Outlook Survey, along with the separate Survey of Consumer Expectations, might show business conditions deteriorating even as inflation expectations and price-setting behaviours remain relatively sticky. Growth in both core and headline price baskets probably kept softening in September, but the central bank’s target measures could remain stubbornly elevated and lift odds on a rate increase later this month – as Governor Tiff Macklem noted last week, “Inflation’s still too high, it’s still too broad-based”.

Safe haven buying is supporting the dollar and Swiss franc, but not the yen. With wider geopolitical risks simmering in the background of the Israel-Hamas conflict, foreign exchange traders are exhibiting a clear, and growing, preference for currencies that have traditionally offered some protection against turbulence, but remain wary of further declines in the yield-sensitive Japanese unit. That this is happening – despite the yen’s role in funding global carry trades – speaks volumes about how sceptical markets have become on the prospect of a shift away from the Bank of Japan’s easy-money policies.

Traders are bracing for Thursday’s comments from Jerome Powell, which could provide the most substantive insight into the prevailing policy mindset before Federal Reserve officials enter their pre-meeting blackout period. Based on our understanding of the evolution in economic conditions currently occurring, he seems most likely to mirror his counterparts in suggesting that rising yields and tighter financial conditions are helping reduce the need for additional rate increases – however, given that markets are prone to overreacting to signs of incipient dovishness, he may choose to express a more hawkish view. We don’t expect policymakers will deliver another rate hike at the November 1 meeting, but market-implied odds are currently below 10 percent – which may be too low.

 
Still Ahead

TUESDAY

The British labour market is seen losing momentum in the latest jobs report. Private sector wage gains should slow sharply, rising at a 7.9 percent annualised pace in the three months ended in August, down from 8.1 percent previously. The unemployment rate should hold steady, helping ratify bets on the Bank of England maintaining rates at current levels for a prolonged period. (02:00 EDT)

The US consumer likely slowed spending in September, but the headline retail sales print should help boost gross domestic product expectations and force the Federal Reserve into remaining relatively hawkish. Markets think overall receipts rose roughly 0.2 percent in the month, but the ex-auto, ex-gas measure – “control group” sales – might have flatlined on a downturn in sentiment. (08:30 EDT)

Canadian price data could play a crucial role in setting expectations ahead of the Bank of Canada’s next decision. Markets expect a continuing moderation in the underlying price measures followed by the central bank, but – as recent US data has shown – a higher print remains a possibility. We remain convinced the Bank is now on hold for the duration, but markets have retained a modestly-hawkish bias, and could be encouraged to bid up the loonie on a stronger-than-expected number. (08:30 EDT)

A raft of Chinese activity data could trigger a modest reversal in global market sentiment, with stimulus efforts likely to show signs of gaining traction in the world’s second-largest economy. Gross domestic product is seen expanding 4.5 percent in the third quarter, industrial production should post a 4.3 percent year-over-year gain, fixed asset investment might flatline at 3.2 percent year-over-year, and September retail sales could rise to 4.8 percent from the prior month’s 4.6-percent pace. (22:00 EDT)

WEDNESDAY

Markets expect British headline inflation to continue its slide in September, dropping to 6.5 percent year-over-year, down from 6.7 percent in the prior month, shrugging off a significant rise in gasoline prices. Core consumer prices should also ease, but the key services cost aggregate could slip more slowly, exhibiting signs of stubborn price pressures in wage-driven areas of the economy. (02:00 EDT)

THURSDAY

Fed Chairman Jerome Powell is expected to follow most of his colleagues in delivering a “near peak” message on rates, but could surprise with a more hawkish tone when he addresses the Economic Club of New York. After September’s consumer and producer price indices surprised to the upside and non-farm payrolls blew the doors off, there are good fundamental reasons for thinking rates should move further into restrictive territory – however, with other soft data indicators pointing to a slowdown ahead, we think a cautious approach remains well justified. (12:00 EDT)

FRIDAY

The British high street probably saw renewed losses in September, with consumer demand slowing as borrowing costs ratchet up. Consensus forecasts suggest retail sales contracted -0.2 percent month-over-month, down from August’s surprisingly-robust 0.4-percent gain (02:00 EDT)

Statistics Canada’s preliminary forecast for August retail sales showed a -0.3-percent drop, with weaker auto sales likely partially offset by a jump in gasoline prices – suggesting that underlying consumer spending likely moved into contractionary territory. The advance estimate for September will be closely watched, with any sign of softness likely to drive the Canadian dollar lower on the prospect of a deeper spending slowdown. (08:30 EDT)

Japanese consumer inflation might show signs of exhaustion in September, helping pour more cold water on the prospect of a sharp adjustment in the Bank of Japan’s policy settings. The year-over-year rise in headline prices is expected to drop toward 3 percent after hitting 3.2 percent in the prior month, and the core measure – which in Japan excludes fresh food – could slip to 2.7 percent from 3.1 percent in August. Imported costs – emanating from a global rise in energy prices and a domestically-driven decline in the yen – could remain elevated for months yet, but aren’t likely to justify a wholesale repudiation of the central bank’s easy-money policies. (19:30 EDT)