The Morning Update

The USD steadies, oil prices are up, equities are up, and US treasuries are mixed as risk sentiment lifts modestly. Euro firms vs its peers and European equities rallied as investors took some confidence from assurances by the Italian government that the new windfall tax on bank profits will be capped. Concern remains in China as its economy tips into deflation and factory-gate prices extended declines in July as efforts to ignite a domestic recovery falters. Today sees a light economic docket that will keep investors sidelined ahead of the US inflation report on Thursday.

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In other news. Italy backtracks with a cap on windfall tax after banks shares slide-FT. The White House to detail plans restricting some US investments in China. Canada to sell pipeline stake to indigenous groups through special vehicle. Sony's quarterly profit tumbles as movie business disappoints. Niger ex-rebel launches anti-coup movement in a first sign of internal resistance. India succeeds in reducing emissions rate by 33% over 14 years as renewable energy generation rose and forest cover increased. Rivian raises 2023 EV production guidance, posts narrower-than-expected quarterly loss.

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In currency markets. CNY strengthened after Chinese state-owned banks helped the Yuan bounce off a 1-month low vs USD. AUD & NZD downtrend paused, but the pair remain vulnerable to China woes. Indian rupee's ahead of its central bank's interest rate decision on Thursday. CNY & Asian currencies firm at 0.2% on average vs USD. Trading currencies are mostly steady with ZAR down 0.2%, while JPY, MXN, CHF, NZD & AUD are flat, SEK gains 0.35% and NOK strengthens 0.5% vs USD.

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Oil prices rebound in early trading as tighter supply trumped China demand concerns. CAD rebounds from Tuesday's low of 1.3501 as risk sentiment improves after Italy walked back its windfall tax statement and markets look to Beijing for further stimulus after its economy slipped into deflation. Canadian exports hit a C$3.7 billion trade deficit in June, the largest since October 2020, weighing on Q2 growth and points a weak start to Q3. We anticipate CAD will be rangebound today as investors are expected to be sidelined ahead of Thursday's key US inflation report.

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EURCAD extends gains, up 1.6% as the CAD remains on the back foot on a combination of longer-term demand concerns as China's economy stumbles and expectations that BoC will pause interest rate hikes.

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EUR rebounds through 1.0950 as risk sentiment improves. The single currency recovered ground amid a subdued USD and improving market moves as investors appear to shrug off China's deflation worries. We anticipate Euro will stall below 1.1000 as investors await Spanish, French, Italian, and US inflation reports on Thursday & Friday.

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GBPEUR weakens towards 1.1600, down 0.6% in July as Euro rebounds after Italy walked back its windfall tax on banks by setting a cap on profits helping boost risk-on sentiment.

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GBP breaks through 1.2750 despite an improving risk sentiment. Investors are expected to be sidelined ahead of Friday's UK Gross Domestic Product, Manufacturing Production, and Industrial Production which will help set the stage for a probable 15th consecutive rate hike by the Bank of England in September. We anticipate the pound will hold within its current 1.2430-80 range today with the absence of any key data releases from Europe or the US today.