Nordea writes…
CAD: BoC lags Fed and house prices are still struggling
Bank of Canada lags the Fed. This still seems to be the case, as Poloz followed in the footsteps of Powell and announced an “indefinite” pause in Canadian rate hikes. If the Fed should enact in precautionary cuts (as discussed in the section above), then BoC is still well too aggressively priced. On top of that USD/CAD has never dropped with house price trends as weak as current in Canada.
USD/CAD has NEVER dropped with as weak Canadian housing trends as currently (note the reversed left-hand axis)
The dollar smile framework
Moving left in the dollar smile?
The dollar smile is a framework through which to understand the direction of the dollar. In the leftmost part of the smile, the US outperforms the rest of the world. The Fed is relatively hawkish, which reduces global USD liquidity. This is bad news for risk appetite but good news for the USD. In the rightmost part of the smile, global growth is slowing. Risk appetite weakens, USD liquidity becomes increasingly scarce. This is good news for safe-havens (USD, JPY, CHF). In the lowest part, global growth is more evenly distributed and robust, risk appetite is solid and global USD liquidity is rising because of improving global trade. This is bad news for the dollar but good news for riskier currencies.
The dollar smile – moving left, not down
Nordea has lately been in the top-right part of the smile, but had hoped we would move towards a lower quadrant due to green shoots in China and eventually also a pick-up in the Euro-area. Alas, there are yet no clear signs that a weaker EUR is paving the way for improving Euro-area growth. We do still remain hopeful that we will see such signs in coming months, however.
Strong USD ought to weigh on ISM right about now
Andreas conclude “In the near term, the USD break-out could spell trouble for risky assets. If DXY is now resurgent, it could severely dent the revenue outlook for the S&P500, some 50% of its revenues does stem from abroad, after all. A stronger USD also potentially spells trouble for emerging market currencies, should the nascent rally have more legs.”