News & Analysis

USD

Irrespective of the move in yields or equities, the overriding theme in FX markets this week has been the consolidation of the dollar, and yesterday was no different. Alongside the Swedish krona, which fell six tenths of a percent after the Riksbank cut rates by 25bps to become the second G10 central bank to do so this cycle (more in EUR), the other major move in the dollar came once again against the Japanese yen, where the macro community continued to add length following last week’s rounds of intervention. In fact, even the popular high yielding LatAm currencies, which outperformed at the start of the week as volatility began to subside in markets, came under pressure from the greenback yesterday despite the lack of US-specific catalysts.

Price action overnight has continued in this vein ahead of what is likely to be a more substantive session for FX traders to sink their teeth into. All G10 currencies are marginally weaker against the US dollar, led once again by SEK and JPY, while across EM markets most currencies also trade weaker heading into the European session. Even the Mexican peso, which has been in the spotlight this week given the much reduced levels of cross-asset volatility and speculation that Banxico will remain hawkish in its guidance this evening, is trading a quarter of a percent lower this morning. This is after the BCB struck a surprisingly hawkish tone last night after local markets closed, cutting rates by just 25bps compared to its previous guidance of a final 50bps cut, highlighting risks still remain tilted to the upside for LatAm rates and inflation, supporting carry conditions.

As mentioned, today is set to be a busier session for traders. Not only are there  interest rate decisions from the UK, Poland, and Mexico, all of which are subject to varying degrees of uncertainty, but the calendar is also filled with speeches from ECB and Fed members, notably ECB Vice President de Guindos at 13:15 BST and San Francisco Fed President Mary Daly at 19:00 BST, who has voting rights this year. Additionally, on the UK side, markets won’t just receive updated guidance from the Bank of England’s main policymakers at 12:30 BST, but also an update from Chief Economist Huw Pill at 17:15 BST. This is especially pertinent given the uncertainty over the BoE’s forward guidance and Pill’s contrastingly hawkish tone relative to Governor Bailey and especially deputy Governor Dave Ramsden. Given how the US data calendar is fairly light today and monetary policy is fairly synchronised across regions, we expect decisions and commentary by respective policymakers to have broader implications for their regional currencies and ultimately the dollar.

GBP

After a relatively light week of UK data and events so far, today sterling traders finally get something to get their teeth into. Starting with two data releases published just after midnight, both the REC report on jobs and the RICS residential market survey pointed to further signs of economic cooling, but not to the extent that either is likely to worry policymakers. That said, the first of these is likely of greater significance for the BoE, with both the permanent placements index and the permanent salaries index rebounding in April. Despite a bounce, however, the former reading remains below 50, pointing to a labour market that continues to loosen at the margin, while a climb in the latter is consistent with a temporary impact from April’s National Living Wage rise. All told, this should keep the BoE cautious, but still optimistic that labour market pressures should continue to ease, at least once the impact of the NLW rise is traversed. We think such guidance will be forthcoming from Threadneedle Street later today in a policy where the BoE is expected to keep rates on hold at 5.25%.

While the outcome of today’s meeting is known, there is still considerable uncertainty over the Bank’s forward guidance. This will be examined across three variables. Firstly, the voting split. While Deputy Governor Ramsden is expected to join external member Dhingra in voting for a cut, traders will be conscious of the risk of further dissenters. Second, we expect the BoE to downgrade its inflation projections, purely based on the more hawkish market implied conditioning path for rates. However, the extent of the Bank’s inflation downgrades will be key for markets in determining how much of a hawkish signal the Bank seeks to project. Finally, and most importantly, is Governor Bailey’s press conference. Despite some of his recent statements having been widely interpreted as dovish, on further inspection we are inclined to think that they were not quite as dovish as some have suggested. Instead, we suspect that he is far more closely aligned with Chief Economist Huw Pill in his views (who is also due to speak later in the day), which we think points towards an August start to policy easing. With markets currently pricing the June rate decision as a coin flip, a hint in this direction should see short term easing bets pared, and a stronger pound as a result.

EUR

The single currency continued to trade within a narrow range yesterday. In terms of economic data, while industrial production data out of Germany provided another positive surprise, it continued to show the manufacturing sector ailing under the pressure of higher rates and weak external demand. Therefore, while the data marginally exceeded expectations, it wasn’t wholeheartedly positive for the eurozone outlook, dampening some of the optimism from Tuesday’s retail sales. With the economic outlook still subject to a high degree of uncertainty, it wasn’t surprising that markets took comments from known ECB hawk Robert Holzmann with a heap of salt yesterday. In a local media publication, the Bank of Austria Governor said he sees “no reason for us to lower policy rates too much and too fast”. Looking ahead to today, the eurozone calendar remains uninspiring, meaning EURUSD should continue to trade in tight ranges. That said, there is the potential for ECB Vice President de Guindos to move the needle. While we don’t expect him to be too explicit with his guidance ahead of key wage data release in a fortnight’s time, with markets pricing just a 20% probability that the ECB cuts again in July, there is plenty of scope for de Guindos to sound dovish, weighing on EURUSD as a result.

With price action in EURUSD fairly limited yesterday, attention naturally gravitated to Sweden where the Riksbank cut rates by 25bps to 3.75%, becoming just the second G10 central bank to do so this cycle. While policymakers delivered the cut in a hawkish manner, reflecting the risk that a cut in rates would exacerbate SEK weakness and drive another round of inflation, the krona still sold off half a percent against the euro. Although the scope to short SEK remains limited by the risk that it will promote the Riksbank to hold policy moving forward, yesterday’s decision underscores the view that SEK remains firmly in the funding basket. We expect EURSEK to stabilise at around 11.7 moving forward for these reasons.

CAD

With minimal news flow out of either the US or Canada on Wednesday, it was surprising to see USDCAD track sideways to finish the day’s trading virtually unchanged. Many Canadians will likely be hoping that today brings more of the same too, given that the only domestic release of note is the BoC’s Financial Stability Report. While a clean bill of health is unlikely to offer much loonie support, any signs of concern could well weigh on CAD, and on Canadian assets more broadly. That said, even with a press conference with Governor Macklem and Deputy Governor Rogers to discuss the reports findings, we are inclined to think they will be circumspect in their views, which should make the report a non-event for markets. That leaves the focus for loonie traders on tomorrow’s jobs data. Further signs of labour market cooling look likely, which should once again reinforce the message that the BoC needs to ease rates much faster than the Fed. All told, this is a recipe that should see USDCAD higher to end the week.

 

 

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