The Morning Update

The USD slips, oil prices are holding steady, equity markets are down, and US yields are mixed as China's economic fears mount. The USD holds near monthly highs, China's central bank steps up intervention after CNY hits 16-year lows vs USD, bitcoin is set for its worst weekly drop in three months, and equity markets are poised for a third weekly decline on mounting China's economic concerns. The Chinese property developer giant Evergrande seeks protection from creditors, filing for bankruptcy protection in a US court as part of the world's biggest debt restructuring exercise, highlighting China's worsening property crisis and weakening domestic economy. China's property sector crisis is fanning contagion fears, which could have a destabilizing impact on its domestic economy which is already under pressure from slow domestic consumption, falling factory activity, rising unemployment, and weakening overseas demand. Today may see markets consolidate with the absence of any US economic releases, but we expect to see risk sentiment remain under pressure.

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In other news. Evergrande seeks US court nod for $32 billion debt overhaul as China economic fears mount-Reuters. Ukrainian drone damages building in Moscow, disputing air traffic, Russia says. US CDC tracks new lineage of virus that causes COVID. Canada wildfire: all 20,000 Yellowknife residents evacuating. The US approves sending F-16s to Ukraine from Denmark and Netherlands. China's Xi to attend BRICS leaders' meeting in South Africa. Bitcoin falls nearly 8% as cryptocurrency slide continues-FT. China leaves Canada off the list of countries approved for group tours.

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In currency news. The USD is set for a 5th-weekly gain. CNY remains under pressure despite PBOC setting higher-than-expected daily fixing. Russian rouble firms towards two-week highs after the Bank of Russia increased its key interest rate to 12%. Commodity currencies remain volatile on increasing China concerns. CNY and Asian currencies are flat on average vs USD. Trading currencies are mixed with NOK falling 0.5%, SEK weakening 0.3%, AUD & CHF are down 0.1%, while ZAR is flat, NZD, & MXN are up 0.15%, and JPY strengthening 0.25% vs USD.

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Oil prices look set to break a 7-week winning streak on a combination of increasing China's economic woes and an increasingly hawkish Fed. CAD is holding near its 10-week lows as the China narrative continues to sour risk sentiment, and slowing demand is expected to increase pressure on commodity-based currencies. In the US the upbeat economic data saw the Fed increase its hawkish rhetoric, while the Canadian economy is showing signs of slowing, highlighted by the unexpected loss of jobs in July. Today with weaker weekly oil prices and more bad news out of China, we expect to see the CAD remain on the back foot to finish the week.

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EURCAD consolidates after a volatile week as risk sentiment waned on worsening economic news out of China.

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EUR continues to trend lower, retesting 1.0850 amid a cautious market mood. Euro is trading near the lows of the week as investors shifted to the safe-haven USD on the combination of China's economic concerns and the hawkish Fed minutes this week. Domestically Eurozone inflation held steady month over month at -0.1% with y/y holding steady at 5.5%, maintaining speculation the ECB will hike another 25bps at its September meeting. The lack of US economic releases today may see investors consolidate gains which may see a pullback towards 1.0900 on profit taking, but in the bigger picture, we favor a retest of 1.0750 next.

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GBPEUR holds at the weekly highs as the prospect of higher UK interest rates continues to provide underlying support to the pound.

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GBP holds above 1.2700 despite disappointing UK Retail Sales data. The UK retail sales fell 1.2% in June, which typically would put pressure on the pound but the heavy rain in June is seen as a major contributor to the weaker-than-expected number and is the main reason why markets have not responded to the news. Expectations are that the BoE will execute its 15th back-to-back rate hike in September as high domestic inflation levels persist. The higher-for-longer rate strategy is expected to provide underlying support for the pound vs its peers through the rest of 2023.

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