The Morning Update

The USD steadies, oil prices firm, and equity markets are down, while US yields are mixed after the Fitch downgrade. The rating agency Fitch on Tuesday downgraded the United States sovereign credit grade rating to AA+ from AAA, citing fiscal deterioration over the next three years; drawing an angry response from the White House and surprising investors. Currency and treasury markets are steady, while global equity markets have slumped over 1% as the Fitch downgrade sours global risk sentiment. Today's focus will be on US ADP Employment Change which is expected to fall to 189k in Jul, down significantly from 497k in June, and will help set the stage for Friday's key Nonfarm Payroll report.

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In other news. Russia strikes Ukraine's Danube port, sending global grain prices higher. OPEC+ panel is unlikely to tweak oil policy at Friday's meeting. West African leaders get tough on Niger with the threat of military action. President Biden to ask Congress to fund Taiwan arms via the Ukraine budget. Canaccord cuts about 75 jobs in Canada as global dealmaking slows. Major global firms warn of slow China sales as the post-pandemic surge fades. Three large UK lenders cut mortgage rates as the inflation outlook improves.

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In currency news. The USD holds steady, shrugging off Fitch's US credit rating downgrade. China's Yuan eases to 1-week lows on domestic economic concerns. Commodity currencies continue under pressure as risk-off sentiment grows. CNY slips 0.1%, while Asian currencies are down 0.2% on average vs USD. Trading currencies are mixed with CHF slipping 0.2%, SEK weakening 0.35%, ZAR, AUD & NZD falling 0.45%, while MXN is flat, NOK up 0.35%, and JPY strengthens 0.5% vs USD.

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Oil prices firm testing near their highest levels since April as crude and fuel product inventory data shows robust demand from the US, offsetting demand concerns elsewhere. CAD continues to weaken, down nearly 1% in August as increasing domestic China growth concerns and the Fitch downgrading of US debt increased risk-off sentiment. A break of 1.3333 (75 cents) could trigger further CAD weakness towards 1.3425 last seen on Jun 2nd. We have no key CAD data until Friday's jobs reports, so the focus will be on the US Jobs data to help provide intraday direction.

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EURCAD holds steady markets awaiting the key US ADP Jobs data.

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EUR remains capped at 1.1000 as risk sentiment sours and investors look to US jobs data for direction. Euro is holding in a relatively tight trading range as the single currency balances souring risk sentiment vs the news of the Fitch downgrading of US debt which initially put pressure on the USD. The disappointing US manufacturing data and the contracting June job opening data put pressure on the USD, but weak domestic growth across Europe and ongoing China concerns are causing the Euro to stall within a 1.0950-1.1050 range. With the Fitch downgrading news taking the markets by surprise, we expect investors to take a cautious approach and remain somewhat sidelined until Friday key US Nonfarm payroll data on Friday.

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GBPEUR remains sidelined, flat for August as investors await the BoE interest rate decision on Thursday.

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GBP is sidelined within a tight trading range, treading water ahead of Thursday's Bank of England interest rate decision. The pound remains trapped within a 1.2750-1.2850 trading range for a third trading session, finding support from a weaker USD and anticipation of a 25 bps hike from the BoE on Thursday. Markets anticipate the BoE will hike 25bps, down from the original expectations of 50bps after domestic inflation levels fell aggressively. Speculation is growing that the BoE may surprise economists by signaling an increase to the pace of bond sales from GBP80 bln to GBP 120 bln as it looks to reduce its outsized footprint in the market. Intraday we expect the pound to remain range bound ahead of the BoE interest rate decision.

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