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Market Briefing: Dollar Weakens as Market Mood Brightens

With a refreshing long weekend behind them and back-to-school lunchboxes (lovingly packed by their moms) sitting on their desks, traders are tiptoeing into markets in a cautiously-optimistic manner this morning. Yields are falling, futures on most major equity indices are in the green, and the dollar is weakening as risk appetite improves.

The Australian dollar remains on the defensive after the Reserve Bank of Australia lifted its cash rate target by half a percentage point for the fourth consecutive time, continuing the most aggressive monetary tightening cycle in decades as it struggles to bring inflation under control. Central bankers hinted more hikes would come in the months ahead but said they were “not on a pre-set path,” suggesting that the pace could slow as price pressures and labour market conditions ease.

The pound is climbing off post-1985 lows on reports the incoming Truss government is preparing a plan to fix household energy prices near current levels by subsidizing suppliers – a move that would reduce the impact on growth and consumer spending, while widening fiscal deficits. The energy regulator, Ofgem, had earlier approved a price cap that would see the average British household pay 80 percent more for gas and electricity in October.

European natural gas prices are back to levels that prevailed late last week, despite Moscow’s decision to halt flows through the Nord Stream 1 pipeline. Governments across the economic bloc are stockpiling supplies and planning conservation measures, market interventions, and subsidy efforts to help businesses and households weather a difficult winter.

Markets are assigning 70-percent odds to a three-quarter-point rate increase from the European Central Bank on Thursday. Euro-area inflation accelerated from 8.9 percent in July to 9.1 percent in August, and could go higher in the months ahead – but growth is slowing as soaring energy prices raise costs across the economy. The common currency is unlikely to rally dramatically on the rate decision itself, but President Lagarde’s words will be monitored closely for insight into the balance between hawks and doves on the Governing Council. Interest differentials between the dollar and euro are in flux, and could see sharp adjustments in the month ahead as both central banks clarify future plans.

Oil prices continue to slide, keeping the Canadian dollar under pressure. Barrels of West Texas Intermediate are going for less than $87 and the Brent benchmark is holding near $93 after yesterday’s essentially-symbolic OPEC+ output cut failed to brighten a gloomy outlook for global oil markets.

The Bank of Canada is expected to deliver a 75-basis point hike at tomorrow’s meeting. The statement is likely to remain relatively hawkish as policymakers try to keep financial conditions on a tightening bias, and there will be no Monetary Policy Report or press conference to dilute the message. But Deputy Governor Carolyn Rogers is expected to lay out the Bank’s thinking in a speech on Thursday, with markets listening closely for evidence of a coming deceleration – with the housing market continuing to slow and consumer spending looking like the next domino to fall, the central bank could soon pause to assess the impact of its monetary tightening campaign.

Today’s agenda is light, with two service sector surveys – from Standard & Poors and the Institute for Supply Management – due this morning. Both are expected to weaken slightly, but as Adlai Stevenson once put it, “opinion polls should be taken but not inhaled,” – political polarization in the United States has dramatically reduced the degree to which surveys represent underlying reality.

Karl Schamotta, Chief Market Strategist

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