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Market Briefing: Dollar Weakens as Markets Pause for Breath

The dollar is retreating and North American equity bourses are setting up for a stronger open as the sense of fear that gripped markets over the weekend begins to ebb.

The pound is climbing after gaining more than a full percentage point overnight as it recovers from a two-day selloff that triggered memories of 1992’s Black Wednesday. The plunge began when new chancellor Kwasi Kwarteng on Friday proposed pairing billions of pounds in energy subsidies with the biggest package of tax cuts in decades. Nerves are still frayed, but gilt yields are falling as panic fades and traders consider the Bank of England’s response in a more sober manner. Markets now expect a 150 basis point hike when the central bank next meets in November, but will look for signs of clarity when Chief Economist Huw Pill’s addresses a monetary policy panel at 9:30 am this morning.

The euro is reversing early gains after German authorities said three separate parts of the currently-idled Nord Stream 1 pipeline had been damaged nearly simultaneously. An accident cannot be ruled out, but an act of deliberate sabotage would suggest that supplies to Europe are unlikely to resume this winter. Traders are pricing in another 75 basis point hike when the European Central Bank meets next month.

Both global crude benchmarks are higher as a weaker dollar and the growing hopes for an OPEC+ production cut provide support. Volatility in oil markets remains elevated as central banks tighten the screws on consumer demand, economically-bearish investors head for the exits, and pressure on oil exporters increases.

Canada’s dollar is rising as implied volatility levels fall and yield spreads narrow. Two-year US government bonds are paying 45 points more than their Canadian equivalents, down from 50 during yesterday’s tumult. But downside risks remain substantial – both of the biggest selloffs in the past decade took the pair down into the 1.43 – 1.46 range, and a similar pattern can’t be ruled out in this cycle if a dollar squeeze unfolds again.

Economists expect US durable goods orders, out at 8:30, to drop 0.5 percent in August from the prior month.

New home sales probably softened in August, rising at an annualized 500,000-unit pace, down from 511,000 in July.

Consumer confidence likely moved in the other direction through early September, with markets expecting falling gas prices and improving economic narratives to lift the Conference Board’s index to 104.5 from 103.2 a month earlier.

Karl Schamotta, Chief Market Strategist

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