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Minding the gap, traders buy the dollar

The dollar remains firm and Treasury yields are ticking higher after yesterday’s sentiment survey data highlighted a yawning performance gap between the American economy and its global counterparts. A series of purchasing manager indices released by S&P Global showed the US as the only major economy remaining in expansionary territory in early October, with composite measures for the euro area, UK, and Japan pointing to further contraction.

We’re not sure the dollar will be acting as the only port in the storm for long. Under-the-hood details suggest inflation pressures are now running at levels consistent with the Federal Reserve’s target, and manufacturing sector metrics show domestic demand stabilizing well below levels that would point to the sort of overheating which might make further policy tightening necessary. In line with Stephen Jen’s “dollar smile” theory, we suspect the economy is entering the kind of “muddle through” scenario that often drives the greenback lower.

The Canadian dollar remains extraordinarily weak ahead of this morning’s Bank of Canada decision. Policymakers are overwhelmingly expected to keep rates on hold amid signs of slowing economic momentum and an ongoing decline in core consumer price measures, with market-implied odds on a move sitting below 5 percent. Tiff Macklem seems likely to follow Jerome Powell in maintaining a hawkish bias in the accompanying statement as he tries to keep expectations well anchored, but we believe the central bank is done hiking rates for this cycle, and the accompanying Monetary Policy Report is likely to contain downgrades to longer-term growth and inflation forecasts.

This might be priced in, however. Incoming data has set the stage for a reappraisal in expectations, so markets are likely well-prepared. From a technical perspective, the pair looks oversold, creating the potential for a sell-on-rumour, buy-on-news dynamic in markets after the policy announcement.

Onshore stock markets, the renminbi, and iron ore prices are modestly higher after the Chinese legislature approved an aggressive expansion in fiscal spending, suggesting that authorities are ramping up efforts to stabilize the economy and financial markets. According to the Xinhua state news agency, the government will run deficits amounting to 3.8 percent of gross domestic product in 2023, up from the 3 percent previously authorised, with at least 1 trillion yuan in bond issuance designated to support increasingly debt-constrained local governments. The new spending is unlikely to have a dramatic impact in the fourth quarter of the year, but could juice the economy’s momentum in early 2024.

As previously suggested, a true turn in sentiment on China could represent one of the biggest risks to the dollar’s ascendancy, meaning that market participants should be keeping a close eye on developments in the world’s second largest national economy.

Still Ahead


The European Central Bank will almost certainly stand pat this week as rapidly-evolving economic conditions put policymakers in a difficult bind. War in the Middle East has ratcheted geopolitical risks higher even as it has raised inflation-critical oil prices, and an early-autumn spike in global bond yields has enhanced monetary policy transmission while threatening to upset a delicate balance between sovereign issuers within the euro area. Higher inflation projections could push policymakers into a final hike at the December meeting, but we suspect slowing growth and widening spreads will keep the Bank on hold through mid-2024, keeping rate differentials tilted against the euro. (08:15 EDT)

The US economy may have grown more than 4 percent on an annualised basis in the third quarter on strong consumer spending, rising inventories, and an improvement in net exports. Consensus forecasts are pointing to an above-4.5 percent print, and the Atlanta Fed’s “nowcasting” tool is currently estimating growth at 5.4 percent – a pace which, if realized, would be five times faster than economists had anticipated when the quarter began. Few expect this pace to hold up. (08:30 EDT)

Aircraft purchases will likely boost the headline durable goods print for September, but with transport excluded, orders likely fell from August’s 0.4-percent pace as businesses and consumers turned more cautious. Economists are forecasting an above-2.5 percent jump in overall orders, but expectations are much lower for “core” orders, which are seen rising just 0.3 percent. (08:30 EDT)

Canada’s equivalent to the US non-farm payrolls report should show labour market conditions remaining relatively tight in August, even as signs of softness began to emerge. More recent data showed the unemployment rate rising in conjunction with a solid increase in the number of new jobs in September (08:30 EDT)


The Federal Reserve’s preferred inflation indicator is thought to have accelerated slightly in August, with consumer outlays rising at a strong clip on higher gasoline prices and continued wage growth. Consensus forecasts – and Jerome Powell’s comments last week – suggest the core personal consumption expenditures index rose 0.3 percent month-over-month, speeding up from 0.1 percent in August, and climbing 3.7 percent year-over-year. Based on estimates derived from earlier data releases – including retail sales and the non-farm payrolls report – personal spending likely increased at least 0.5 percent, and incomes might have risen 0.4 percent. (08:30 EDT)

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