Sizzling Canada & NFP Rumour Trade

Canada posted its best half in 16-years as Q2 soared above expectations. The Canadian dollar was easily the top performer on the day and USD/CAD suffered further on late USD selling ahead of nonfarm payrolls, which is the main highlight in the day ahead as the calendar turns to September. We will also take a look at seasonals. 2 new Premium trades have been issued in USD and GBP pairs.

Canadian GDP rose 4.5% q/q annualized in the second quarter, far above the +3.7% consensus in the best quarter since 2011. It builds on +3.7% growth in Q1. The details of the data were just as positive as consumers, business investment and trade all expanded along with incomes. Compared to a year ago, GDP is up 4.3% and all the forward-looking metrics point to another decent quarter for Q3.

That will certainly draw the Bank of Canada's attention ahead of the Sept 6 meeting. The odds of a hike rose to 41% from 26% in the aftermath of the report. USD/CAD fell nearly 2 cents and could fall much more if a hike comes and is coupled with a hawkish statement.

The US also got some good news as personal income rose 0.4% in July compared to 0.3% expected and the Chicago PMI was slightly higher. But other indications were negative. Pending home sales fell 0.8% as signs mount of a rut in housing. In a sign that inflation pressures aren't building, the core PCE price index fell to 1.4% annualized from 1.5% in July.

Mnuchin & Data Rein in USD

The dollar fell about 75 pips across the board in the latter half of the day. Part of the blame was heaped on Mnuchin for saying a weaker dollar was better for trade but focusing on that line alone took his words out of context.

What's more likely is that month-end flows depressed the dollar. There is also abundant talk about how August non-farm payrolls consistently underperform. They've missed the consensus on the first reading in 16 of the past 20 years including an average of 48K in the past six years.

We get the sense, however, that it's a well-known seasonal hiccup and that most traders may be selling USD on the rumour of a soft report. In turn, they could cover when the data hits, even if it's weak.

Quick hits:

The Chinese yuan remains the least talked about story in FX. It was easily the best performing currency in August, followed by the Swiss franc and euro. The New Zealand dollar lagged badly.

Most major stock markets were up in August but less than 1%. Factoring in FX changes, the Nasdaq and Italian MIB were top performers.

At the start of August we warned it was tough month for the pound. Cable fell 2% and only the New Zealand dollar fared worse than GBP.

We also warned that gold was a winner in August. It gained more than 4% en route to the highest levels since November 2016.

On Aug 1, we highlighted that August was a poor month for AUD and fell in 10 of the past 12 Augusts. That continued and it had been down as much as 2.3% mid-month but recovered to finish down 0.7%.

Finally, we warned about consistently high volatility in August and that was definitely the cast as the VIX jumped as much as 68% before fading to just a 3.3% gain at month end.

We will have September seasonals in the days ahead.