<p>The Canadian dollar is at an interesting spot on the global spectrum of risk assets at the moment.</p><p>Domestically, it’s been a good year with strong GDP growth as the economy reopened from covid. Commodity investment has picked up and terms of trade have improved.</p><p>For much of the year, that kept the loonie neck-and-neck with the US dollar as the top G10 performer. Lately though, it’s lost some ground.</p><p>Some of that is domestic. The two most-recent Canadian jobs reports have been soft and there have been other signs of creeping demand. House prices are down around 15% from the February peak as well, though still up around 5% y/y.</p><p>I don’t think those factors are having a big effect on the loonie. Instead, it’s intensifying worries about the global economy and rate differentials that are weighing.</p><p>Yesterday’s <a target=“_blank“ href=“https://www.forexlive.com/news/fedex-warning-has-stock-futures-deeply-negative-20220916/“ target=“_blank“>warning </a>from FedEx on global macro deterioration speaks to the mood of the market. Global equities struggled all week and the market can’t see past the energy crisis in Europe or covid-zero in China. High commodity prices and inflation are also wreaking havoc on emerging market growth.</p><p>Rate differentials an emerging factor</p><p>It’s critical to understand the differences in the US and Canadian housing market. Rate hikes in Canada hit the consumer harder and more directly than in the US. Canadians either have fixed rates with 5-year terms or variable rates that adjust immediately. Contrast that with the US where mortgages have fixed rates for 30 years.</p><p>That means that many Canadians are directly feeling the pinch from higher rates while the only Americans who feel it are those moving or buying a home for the first time. In practice, it means that Bank of Canada will struggle to get above 4% while the Fed will have more latitude.</p><p>Before this week, both were expected to pause around 4% but now Fed funds are pricing in 4.40% in March. That’s creating a central bank divergence and cleared the way for a break above 1.32 in USD/CAD. I continue to think the destination is 1.37.</p><p>In the longer term, there’s mounting evidence hat commodities will be in short supply in the back half of this decade and that makes Canada one of the best places to be. Over the next year though, that’s not the case. North America is slowing down and central banks everywhere are raising rates at an unprecedented pace. There’s a real chance of a policy mistake and recession everywhere.</p>

This article was written by Adam Button at forexlive.com.

<ul><li><a target=“_blank“ href=“https://www.forexlive.com/news/umich-september-us-prelim-consumer-sentiment-595-vs-600-expected-20220916/“>UMich September US prelim consumer sentiment 59.5 vs 60.0 expected</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/putin-says-main-goal-is-to-liberate-donbas-region-and-we-are-not-in-a-hurry-20220916/“>Putin says main goal is to liberate Donbas region and ‚we are not in a hurry'</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/cnn-chinas-xi-has-told-military-wants-china-to-have-capability-to-take-taiwan-by-2027-20220916/“>CNN: China’s Xi has told military he wants China to have capability to take Taiwan by 2027</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/uk-planning-to-cut-business-energy-rates-in-half-20220916/“>UK planning to cut business energy rates in half</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/the-bakers-hughes-oil-rigs-move-up-8-in-the-current-week-20220916/“>The Bakers Hughes oil rigs move up 8 in the current week</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/centralbank/canadian-july-wholesale-trade-06-vs-06-expected-20220916/“>Canadian July wholesale trade -0.6% vs -0.6% expected</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/saudi-arabia-and-russia-see-100-as-a-fair-price-for-oil-report-20220916/“>Saudi Arabia and Russia see $100 as a fair price for oil – report</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/canada-august-housing-starts-2674k-vs-2650k-expected-20220916/“>Canada August housing starts 267.4K vs 265.0K expected</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/eurozone-core-cpi-final-mom-aug-act-07-prev-02-fcst-06-20220916/“>Eurozone Core CPI Final MoM (Aug) Act: 0.7% Prev: 0.2% Fcst: 0.6%</a></li><li><a target=“_blank“ href=“https://www.forexlive.com/news/uk-retail-sales-uk-retail-sales-mom-aug-act-16-prev-03-fcst-05-20220916/“>U.K. Retail Sales U.K. Retail Sales MoM (Aug) Act: -1.6% Prev: 0.3% Fcst: -0.5%</a></li></ul><p>Markets:</p><ul><li>WTI crude oil up $0.21 to $85.30</li><li>US 10-year yields down 1 bps to 3.45%</li><li>Gold up $10 to $1673</li><li>S&P 500 down 28 points to 3873, or 0.7% — down 4.8% on the week</li><li>NZD leads, GBP lags</li></ul><p>It could have been worse.</p><p>The FedEx warning late yesterday boosted the dollar and weighed heavily on equity futures. In the end, the decline in the S&P 500 was only about half of the worst levels. The commodity currencies in particular showed some late life and that ensured AUD/USD closed above some critical levels after touching a two-year low in early European trade.</p><p>The euro caught a bid into the London fix. It later gave about half of that move back but ultimately finished 10 pips higher with some late-day bids on improving equities.</p><p>The simmering catalyst was a dip in inflation expectations in the UMich survey. Both 1 year and 5-10 year inflation moved lower month-to-month and led to a small bid in bonds. It also led to a drift lower in 100 bps Fed hike odds from 25% to 17%.</p><p>Cable ended the day as the worst peformer but it made up some ground in US trade as it rose to 1.1423 from a low of 1.1351. The catalyst was a soft retail sales report. Late in the day we also learned the businesses will be getting their power bills cut in half. The question is: Was the market expecting more help on energy?</p><p>USD/JPY remains a focus with the threat of intervention looming. The pair formed something of a double top at 143.75 today and drifted lower to finish near the lows at 142.94. That’s still a gain on the week but the 145.00 level is looking like a tough one to crack and that’s five straight weeks of gains.</p><p>Have a wonderful weekend. Next week is Fed week.</p>

This article was written by Adam Button at forexlive.com.

<p>Closing changes for the main US markets:</p><ul><li>S&P 500 -0.6%</li><li>Nasdaq composite -0.8%</li><li>Russell 2000 -1.7%</li><li>DJIA -0.4%</li></ul><p>On the week:</p><ul><li>S&P 500 -4.8% — worst since week ending June 17</li><li>Nasdaq composite -5.5%</li><li>Russell 2000 -4.9%</li><li>DJIA -4.1%</li></ul><p>Now for more bad news: There’s an outside bearish reversal on the weekly chart of the S&P 500 (and the Nasdaq as well).</p><p>If that’s not bad enough, next week is the worst week on the calendar seasonally for equities, over the past 50 years.</p>

This article was written by Adam Button at forexlive.com.

<p>A bounce earlier today took the S&P 500 to 3873. We’re 9 points below that now and 27 points above the low. If it can get into the post-opening gap, there could be some follow-through.</p><p>Lots of eyes are on the WSJ because we’re now right around the time when the June FOMC leak hit. For now though, there’s no news and there’s not much happening in bonds or FX.</p>

This article was written by Adam Button at forexlive.com.

<p>Bloomberg reports that UK businesses will get their energy bills cut in half in a government bailout package.</p><p>The market has been assuming that some kind of business bailout was coming and I’m not sure this is good enough. Consumer bills will be capped at £2500 and that same largess was never going to come to businesses but I suspect more than this was anticipated.</p><p>I’ve been arguing that we’re starting to see the covid playbook from governments, where they take on all the financial risk of the crisis rather than letting businesses and consumers suffer. Instead, it’s evolving into more of a covid-lite approach. Given that central banks are also raising rates and hurting the economy, it might not be enough to stave off a tough recession.</p><p>Cable is largely unmoved on this news but earlier today it trade to the lowest since 1985.</p>

This article was written by Adam Button at forexlive.com.