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Market Briefing: Worsening Risk Appetite Pummels Global Currency Markets

With real yields storming higher, the dollar is extending its rally this morning, sending the pound, euro and yen tumbling toward multi-decade lows. Global financial conditions are tightening and traders are bailing out of risk-sensitive assets ahead of next week’s Federal Reserve meeting, where policymakers are expected to deliver 75 basis-point hike and guide terminal rate expectations firmly above the 4.25 percent mark.

The British pound is plumbing levels last seen in 1985 after a weak retail sales report exacerbated fears of a deep and prolonged recession. The Office for National Statistics said receipts dropped 1.6 percent between July and August, with all major sectors slumping as rising living costs impacted consumer behaviour. The Bank of England is expected to hike rates for a seventh consecutive time next week, but evidence of a slowing economy is lowering odds on a 75 basis-point move – and helping widen interest rate differentials against the pound.

The Canadian dollar is trading near its 2020 lows, despite two-year yields hitting the highest levels since 2007. The currency remains one of the best-performing major currencies this year, but has come under sustained pressure with the dollar crushing everything in its path and commodity prices struggling to gain traction. Oil benchmarks are down, with West Texas Intermediate flirting with the $86-per-barrel mark and Brent trading around $92. If market momentum continues, technical resistance in the dollar-Canada pair could next emerge around the 1.3420 level touched in September 2020.

China’s economy exhibited signs of improvement in August as government stimulus measures begin to lift activity – but consumer demand remained weak as the property prices slumped and coronavirus lockdowns continued. Data released last night showed industrial production climbing 4.2 percent year-over-year as drought conditions and power shortages eased. Fixed-asset investment in the first eight months of the year was 5.8 from the same period in 2021, suggesting that infrastructure spending was accelerating. But retail sales fell roughly 0.8 percent month-over-month in seasonally-adjusted terms, and average new-home prices in 70 major Chinese cities tumbled 2.1 percent from a year earlier.

The renminbi is trading below 7 to the dollar on both onshore and offshore markets as interest differentials tilt inexorably in the greenback’s favour. The People’s Bank of China has set fixing levels at stronger levels for more than two weeks, but – with the trade-weighted yuan moving sideways – there have been no other outward signs of official intervention to support the exchange rate.

A preliminary update to the University of Michigan’s consumer sentiment index is expected to show dramatic improvement in early September, jumping to 60 from 55.1 in August. Households have turned steadily more optimistic since gasoline prices began to slump in mid-summer, shifting the mood in the US economy, lowering odds on an imminent recession, and raising interest rate expectations across the front end of the curve.

Have a great weekend, and remember that things could be worse – Argentina yesterday raised its benchmark lending rate to 75 percent.

Karl Schamotta, Chief Market Strategist

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