The Morning Update

Friday September 1st, 2023

Written by:
Paul Harrison

The USD is flat, oil prices gain, equity markets are up, and US yields rise ahead of the August payrolls report. Markets are settled ahead of the key US jobs data this morning. Equity markets are edging higher, the USD Index and Treasury yields are holding steady, while oil prices are set for the biggest weekly advance since April. Today's US Nonfarm Payroll is expected to provide further evidence of a slight cooling within the still-tight labor market. The key question is whether this will be enough for the Fed to pause its current tightening cycle. In Europe, its weakening economy has seen bets of an ECB rate hike in September reduce to 40% from 60%, with expectations that the central bank will pause rates at 3.75%. In China, fresh stimulus efforts have helped boost risk-on sentiment after Beijing allowed the nation's biggest cities to cut down payments for home buyers and encouraged lenders to lower rates on existing mortgages and existing deposits. Today alongside the US Nonfarm payroll, the focus will be on US Manufacturing PMI  and CAD GDP which will help provide intraday direction to currency markets.

In other news. China boosts housing market and renminbi support-FT. UK government promises to cover the costs of school closures. Foxconn founder Terry Gou shakes up Taiwan's presidential election. EU imports record record volumes of liquefied natural gas from Russia. Flights canceled, businesses shut in Hong Kong, Guangdong as typhoon Saola nears. Ukraine drone attacks Russian town near major nuclear plant. Cybercrime to cost Germany 206 billion euros in 2023, associations say. EU authorizes use of adapted Pfizer/BioNtech vaccine for covid-19 variant. Mortgage growth buckles under the weight of rate hikes in Canada-Bloomberg.

In currency news. The USD Index slips ahead of key US jobs data. CNY, NZD & AUD are set first weekly gains in nearly 2-months. Japan's Finance Minister offers no clues on intervention as Yen remains under pressure. ZAR strengthens after local PMI data. Currency markets steady ahead of today's key US jobs data. CNY & Asian currencies are flat on average vs. USD. Trading currencies are mixed with MXN tumbling 0.8%, AUD, SEK & NZD slipping 0.1%, while JPY & CHF firming 0.1%, NOK strengthening 0.25% and ZAR rallying 0.8% vs. USD.

Oil prices advance +1% and look set to snap a two-week losing streak on continuing tighter supplies. CAD extends gains on a weakening USD with expectations that the US labor markets are starting to cool, which increases speculation that the Fed may pause its current interest rate hiking policy. In the bigger picture, CAD weakened over 2% in August as the slowdown in China's economy increased pressure on commodity-linked currencies. Alongside the US data, investors will be focused on CAD Q2 GDP report which is expected to show a sharp slowdown in growth which could lead to the BoC to pause its hiking policy despite continuingly high inflation levels.

EURCAD holds steady ahead of key US & CAD economic data releases.

EUR steadies near 1.0850 vs. USD ahead of key US NFP. Euro stalls after Thursday's sharp decline following weaker-than-expected Eurozone economic data and increasing expectations that the ECB could pause at its September meeting. The euro has maintained its bearish tone, falling for a sixth consecutive week which saw the euro test two-month lows at 1.0765 on escalating expectations of a recession to hit across the Eurozone despite Germany initiating significant stimulus efforts. Intraday results from the US economic releases will help drive the single currency today.

GBPEUR holds steady, but expectations that the pound has potential for further strength as the BoE is expected to hike rates in September, while the ECB is increasingly expected to pause rate hikes at its September meeting.

GBP bounces off intraday lows as the focus shifts to the US Jobs data. Investors continue to focus on central bankers' comments on interest rate direction to drive the currency markets. BoE Chief Economist Pill's comments on the policy outlook make it difficult for the pound to maintain its strength. Pill said that this is no room for complacency on inflation, but noted that he would prefer to hold rates steady for longer. Markets expect the BoE to hike rates by 25bps in September, and may need to hike one more hike in 2023. The focus will be the US NFP data release today, a print-outside expectations would increase volatility for the currency markets.