Euro Gains on Soft US Labour Data, While European Stocks Decline Amid Global Rout
The euro strengthened by over 0.3% on Wednesday, reaching $1.1085 against the US dollar after a weak US labour market report, reversing its losses for the week. In contrast, European stocks fell, with the STOXX 50 dropping over 1% as part of a global stock market downturn. Bonds rallied across markets, following similar moves in US Treasuries, while the front-end yield spread between Germany and the US narrowed to below 150bps, the smallest margin since May 2023.
In the Eurozone, domestic market activity was quiet, overshadowed by US developments. The Eurozone's August services PMI was revised down to 52.9 from 53.3, marking the seventh consecutive month of expansion, with the sharpest growth in three months. This growth was mainly driven by France, likely boosted by preparations for the upcoming Olympic Games.
Meanwhile, ahead of the September 12 ECB rate-setting meeting, several ECB officials shared their perspectives before entering a quiet period. Policymakers are largely expected to cut borrowing costs again following a significant reduction in June. ECB’s Kazaks hinted at a potential rate cut in the upcoming meeting, echoing other officials’ support for further cuts after no action was taken in July. The case for another cut has been supported by inflation falling to its lowest level since mid-2021, although some policymakers remain cautious, emphasizing that inflationary pressures are not fully resolved.
In the FX volatility market, attention is focused on the upcoming US Non-Farm Payrolls (NFP) report. A slight weakness in the dollar is expected to persist, especially if the US services ISM underperforms. EUR/USD one-week implied volatility rose to 7.5%, about 150bps above realized volatility, hitting a two-month high.
US Dollar Slides After Weak Labour Data, Focus Shifts to Upcoming Non-Farm Payrolls
After a strong start to the week, the US dollar weakened following softer-than-expected labour market data. Investors are now closely watching Friday's non-farm payrolls (NFP) report. Markets were already rattled by Tuesday's disappointing manufacturing PMI and a sharp drop in job openings for July, released on Wednesday.
Futures markets now predict a 45% chance of the Federal Reserve cutting interest rates by 50 basis points at its September meeting. Bond yields continued their two-week decline, and for the first time since 2022, the yield curve (2-year vs. 10-year) un-inverted. The US dollar dropped against all G10 currencies in yesterday's trading.
Job openings fell from 7.91 million to 7.67 million, the lowest level since early 2021. According to the Bureau of Labour Statistics, a key Fed metric—vacancies per unemployed worker—reached a three-year low. The decline was mainly driven by reductions in vacancies in the government, healthcare, and trade & transportation sectors. Additionally, the number of people quitting jobs and those finding new ones fell below pre-pandemic levels, standing at 3.28 million and 5.52 million, respectively.
Survey data from the Conference Board, including the labour market ratio (jobs plentiful vs. jobs hard to get), suggests further softening next month. The same is true for Tuesday’s PMI, with the new order vs. inventory indicator pointing to continued challenges in manufacturing. Friday’s jobs report will be crucial in determining whether the Fed will opt for a 25 basis point cut instead of a larger 50bp reduction and could either restore confidence in the dollar or lead to further weakness if job growth disappoints.
Canadian Dollar Strengthens Despite Dovish Bank of Canada Rate Cut
The Canadian dollar edged toward the low CAD/$1.35 range against the US dollar, despite the Bank of Canada’s dovish policy decision. Canadian bonds outperformed US Treasuries, with the 10-year yield trading about 2 basis points higher relative to the US 10-year, which remained largely unaffected by the BoC’s decision.
The Bank of Canada cut its policy rate by 25 basis points, lowering the overnight lending rate to 4.25%, as expected by the market. The central bank pointed to growing economic concerns, with inflation nearing the 2% target. Preliminary data suggests Q3 growth could fall short of the Bank's July projections, while the labor market remains stagnant, with unemployment steady at 6.4%. This opens the door for potential further rate cuts. Governor Macklem also highlighted that persistent price pressures in the housing market and certain service sectors continue to drive inflation.
Despite the rate cut, the Canadian dollar remains one of the more vulnerable G10 currencies, as yield differentials diminish its attractiveness. The BoC has already implemented three rate cuts this year and is expected to continue easing, while the extent of the Federal Reserve’s future rate cuts remains uncertain. Currently, overnight index swaps are pricing in an additional 58 basis points of cuts by the BoC by year-end, compared to 100 basis points anticipated from the Fed.
