News & Analysis


Traders found themselves in an uncomfortable equilibrium last week, reacting aggressively to every marginal development that moved the needle for near-term Fed policy. Nevertheless, despite the increased volatility, most currency pairs remain in recent ranges, and while the dollar DXY index declined 0.15% on the week, we are still living in a stronger environment. One region where recent ranges are being tested, however, is Asia. The most pronounced example is Japan, where following the Bank of Japan’s dovish meeting on Friday and the near-2% sell-off thereafter, speculation over potential BoJ intervention has been elevated. This meant the yen was in focus for traders at the start of the week, especially as it opened in holiday-thinned liquidity conditions. Declining 1.4% upon opening, the yen crossed 160 per dollar for the first time in 34 years, before sharply retracing 3%, endorsing last week’s speculation of imminent BoJ intervention. However, unlike 2022, we aren’t as sure that this was the actions of policymakers. Thin liquidity conditions and the lingering threat of intervention around key psychological levels muddies the picture, with the move potentially a result of position squaring around key thresholds. Naturally, we won’t hear from the BoJ or the Japanese Ministry of Finance on this as the effectiveness of their stealth intervention programme relies on it being opaque and unpredictable. However, the moves overnight keep the spotlight firmly on USDJPY this week, especially as the US data calendar holds the potential to cause another sharp repricing in Treasury yields with the latest Fed decision due on Wednesday before April’s payrolls on Friday and the latest ISM services PMI are released. The spotlight won’t solely shine on the yen within the APAC region, however, as the PBoC is also seen managing a slow depreciation in the yuan, while other regional currencies such as the Indonesian rupiah are also trading in a manner that previously forced their central bank to respond in kind.

As mentioned, this week, the economic calendar is fairly substantive for the US and should provide guidance on the next leg for both yields and the dollar. While we will hear from the Fed and Chair Powell on Wednesday, we are dubious that the message will be different to that of the inter-meeting commentary. That is, the Fed’s confidence threshold for cutting rates hasn’t yet been met and the strength of the economic data year-to-date warrants rates to stay on hold for longer than previously assumed. Instead, we suspect Friday’s payrolls data will be of greater influence. Expectations are for the data to remain uncomfortably hot for the Fed to cut, with payrolls printing at 250k, slightly down on their Q1 average of 271k but significantly above average job growth in the second half of last year, and average hourly earnings growth to land at 0.3% month-on-month. If expectations are met, or more importantly exceeded, we expect Treasury yields to trade back above key psychological levels and the dollar to take another leg higher as a result.


The single currency spent most of the past week oscillating around our month-end forecast of 1.07, having climbed back up to that level on vastly improved PMI data for April. This same theme has extended this morning, with the euro entering the European trading session up 0.25% on the day, but remaining well within last week’s ranges. However, the rally was largely induced by the spillover effects of events in Asia as inflation data out of Spain this morning confirms our view that the ECB will need to embark on a sequence of rate cuts commencing in June. If confirmed later today in the German figures and compounded by the French data and weak preliminary GDP figures for Q1 tomorrow, we think the euro will be left vulnerable once again to another rates-induced rally in the dollar as at 2%, front-end yields have room to further diverge.


A series of second and third-tier data releases are unlikely to be hugely disruptive for sterling this week. All eyes instead are likely to be on the US, with a Fed decision due on Wednesday and payrolls on Friday, before the next BoE rate announcement, scheduled for March 9th. In keeping with the market’s current bias to see G10 central bank expectations broadly track those for the Fed, if Chair Powell is hawkish at the margin – an outcome that seems likely given last week’s PCE overshoots, or if payrolls print hot once again, then further pricing out of Fed rate cuts should also lead a similar move Bank Rate expectations this week. This should be positive for sterling on crosses, particularly against the euro where policymakers have been keen to stress their independence from the Fed. All told, this has helped to keep pricing of a June rate cut from the ECB hovering around the 90% mark, which if maintained this week is likely to see rate differentials widen between the eurozone and the UK, and GBPEUR to rebound as a consequence.


While Wednesday’s Fed meeting and Friday’s payrolls are likely to be the key USDCAD catalysts this week, on the domestic front loonie traders will also be keeping a close eye on February’s GDP data, set for release tomorrow, not to mention appearances by Governor Macklem and Deputy Governor Rogers in Parliament later this week. In terms of the data, consensus expectations currently expect to see a modest uptick in activity, with 0.3% MoM GDP growth forecasted, with the economy expanding by 1.1% YoY as a result. This would mark a further pickup in activity readings on an annualised basis, with 0.9% growth having been recorded in January, albeit the monthly figures would be less remarkable having recorded a 0.6% MoM expansion last month. That said, we think there will be two key takeaways tomorrow. First, markets will likely greet any sign of growth as a positive, meaning that even the modest expansion that is currently predicted is likely to take the loonie higher. The second point of note is that the headline print is likely to be misleading. With current population growth north of 3% and an economy already in excess supply, a print in line with expectations is consistent with the demand gap remaining negative and weighing on inflation. Combined with labour market figures that are showing signs of an unwind, and inflation that is already back to target, as we see it the BoC is now at risk of keeping policy too tight for too long and the Governing Council should be easing policy in June.

Whether or not this will be confirmed by Governor Macklem or Deputy Governor Rogers this week remains an open question, though any explicit hint of a June rate cut seems unlikely given their previous reticence. As such, while the 50% odds of a June rate cut look distinctly mispriced to us, these odds are likely to decline further this week if the data prints as markets expect and Governor Macklem offers little of note. This leaves the loonie primed for a short-term bounce in our view, but not one that is likely to be sustained given our expectation for the BoC to ultimately disappoint market pricing, an outcome that should take USDCAD back towards our forecast for the pair to end the quarter trading in the 1.38 to 1.40 range. That said, confirmation from the Governor that a June rate cut is likely should see BoC expectations detach from those for the Fed, suggesting that there remains a risk that this range for USDCAD could be reached as soon as this week.



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