FX Daily Strategy: N America, Oct 10

CAD risks on the downside on consensus Canadian employment report…

…but USD/CAD has only modest scope to break above 1.40

EUR/NOK remains range-bound near term, but NOK may yet be re-rated

Hard to find a trigger for near term reversal of JPY weakness

In the absence of US data we have the Canadian employment report on Friday. The market consensus is for a 2.8k rise in employment, following declines of 41k and 66k in the previous two months. This looks like an improvement, but the two declines followed an 83.1k rise in June, so a 2.8k rise would still represent a deterioration in the 3 month average. As it stands, the BoC is priced as a 65% chance to cut rates at the October 29 meeting, and we would see a number in line with the consensus as supportive of that cut, as it would suggest a deteriorating employment trend.

USD/CAD made a 5 month high on Thursday above the May 19 high of 1.3973, supported by a generally USD positive tone. The Fed is still priced as a 95% chance to cut rates 25bp at the October 29 meeting, so if both go ahead, there is scope for the CAD to weaken further, with a USD/CAD likely to trade above 1.40. We have already nearly returned to the level consistent with the historic correlation with 2 year yield spreads, so we wouldn’t see a lot of CAD downside, and there would likely be a bigger reaction if the BoC don’t cut. So a large rise in employment could be expected to result in a significant CAD recovery, as the market reduces its expectation of easing. But this looks less likely than a USD/CAD test above 1.40 on a consensus number.

Not much change in EUR/NOK after Norwegian CPI, which showed a slightly higher than expected headline inflation rate of 3.6% y/y, but a slightly lower than expected core rate of 3.0% y/y. The data are unlikely to impact the Norges Bank’s policy stance, which anticipates one more cut in rates in the next year, which is also essentially what the market prices in. EUR/NOK remains in the middle of an 11.30-12 range that contains the vast majority of trading in the last two years since the break higher in early 2023. We still see a case for a move back down longer term due to the solid performance of the Norwegian economy and the huge fiscal and current account surpluses it enjoys, but poor liquidity, a vulnerability in risk negative markets and persistent NOK selling form the government pension fund continue to discourage NOK buyers.

The USD showed some general strength on Thursday. It made more ground against European currencies than the JPY, but USD/JPY’s rise this week still makes it look the most out of line with normal metrics. There has been some reduction in expectations of action from Takaichi’s government, partly because it has yet to be formed and the lack of an LDP majority in parliament means plans may need to be scaled back to satisfy any new coalition partners with Komeito leaving the coalition this morning.  JPY weakness still looks unlikely to reverse near term without some more government or BoJ opposition to the recent decline, although Takaichi and Kato's comments in the last 24 hours have helped to stabilise the picture. A turn in the global risk picture could also trigger a reversal. The overvaluation of (US) equities and low level of risk premia have been recently highlighted by the IMF and the ECB as a significant risk, but any correction or reversal will require a trigger, and it’s hard to see where that is coming from any time soon.