News & Analysis


Price action in the broad dollar was muted yesterday as we had expected, with most of the focus occurring in the crosses as dollar pairs remained within recent ranges. Of specific note was CHFJPY and EURJPY, with the former rising to its highest level since the franc was de-pegged in 2015 and the latter reaching peaks last seen in late 2014. Underpinning the moves was a consistent theme of JPY weakness against the G10 after spot markets reacted negatively at the margin to comments made by newly appointed BoJ Governor Ueda, who implied that no policy actions would be taken at Friday’s meeting. Again, price action in USDJPY was contained within recent ranges, and the positioning shakeout from the comments was limited, but in a day where the news cycle was slow, fresh highs in some G10-JPY crosses drew attention. Driving the euro and Swiss side of the equation was continued upside in front-end bond yields, with the German 2-year yield climbing 6 basis points in a day of generally lower yields to trade within a whisker of the 3% handle for the first time since banking concerns emerged in mid-March.

Despite the lack of action in dollar pairs, treasuries stuck out like a sore thumb, with two year falling by 3bp and similarly 5bp on the 10Y, even as yields gained elsewhere. This followed from Dallas Fed manufacturing activity data that massively undershot expectations, having been expected to improve on March’s print of -15.7, it instead came in at -23.4 against a pre-release expectation of -12. Signs of a cooling in economic activity are not likely to remain limited to manufacturing however, with house price data today expected to show a slowdown in house prices as well. MoM new home sales in March are expected to decline by 1.3%, more than offsetting February’s growth, adding to the body of evidence that Fed policy is beginning to weigh on US economic activity. Despite this, it seems likely that price action in the dollar will remain limited once again. With market expectations for the Fed to finally declare a pause in it’s hiking cycle at the upcoming May meeting, it is improbable that today’s data releases will shift the narrative away from anything other than a 25bp hike to terminal. For now, at least, markets seem content to wait and see what Jerome Powell and Co have in store before we see the next significant leg in dollar price action.


Also beginning with a relatively quiet start to the week, with Rightmove house price index the only data of note released on Monday, the pound climbed around three tenths against the dollar whilst retreating marginally on the euro. This follows on from last week’s raft of data releases that despite pointing in the direction of marginally stickier-than-expected inflation, did little to move the pound outside of recent trading ranges. It was therefore no surprise that today’s release of public sector borrowing data that came in almost exactly on expectations did little to move sterling. Likely more interesting for markets will be a talk given by the Bank of England’s Broadbent at 10:00 BST. Speaking to the National Institute of Economic and Social Research at Cambridge University on ‘Monetary policy: prices versus quantities’ and with the May monetary policy meeting fast approaching, analysts will be looking for any hint as to when the Bank is looking to end its hiking cycle. With many analysts now expecting the bank to hike to a terminal rate of 4.5% in May, but market expectations foreseeing a further 2 hikes after this point, a gap has opened up in recent weeks that could provide a catalyst for sterling moves over coming months as this tension is resolved.


The theme of a quiet day was not just limited to the US and UK yesterday, with news out of the eurozone providing only marginally more excitement. The major data points to catch the eye largely came from Germany, with the release of IFO expectations data and news of the outcome of public sector wage negotiations. The expectations data, released at 9:00 BST showed a modest beat, suggesting a pickup in confidence, one that certainly seemed to be shared by Germany’s public sector unions. It was the news that certainly caught our attention, with workers securing a pay deal with an average increase in pay of just under 6% per year over the next two years. With the ECB already concerned around the stickiness of eurozone core inflation, at this pay deal likely to form a benchmark for other wage negotiations in Germany, it is hard to reconcile par rises on this scale with a return of inflation to the 2% target without substantial further interest rate rises. It was here that markets saw the real news of the day, with comments from several central bankers hitting the wires and Eurozone inflation data set to print on Friday. There appears to be a notable split beginning to emerge within the ECB, with markets awaking to comments from the Bank’s Pierre Wunsch on Monday suggesting that a 50bp hike is very much on the cards for the upcoming meeting. Not to be outdone, this was followed shortly after by comments from the ECB’s Villeroy suggesting that smaller hikes were preferable, pointing heavily in the direction of favouring just 25bp of hiking in May. This sentiment seems to be shared by markets, where a roughly one in three chance of a 50bp hike is currently being priced for the May meeting. ECB watchers will likely be looking to the upcoming inflation data and speeches later in the week for a further steer on the Bank’s hiking path, with de Guindos and Lagarde of particular note. But until that point, the euro looks set to remain in a holding pattern as the debate between 25bp and 50bp continues to rumble on.


The Canadian dollar did a whole lot of nothing on Monday, as rising oil prices counterbalanced the downward pressure seen in other cyclical currencies. While the currency performance wasn’t anything to write home about, the latest development in the public sector wage fiasco has raised the ante for policymakers. PSAC, the union for federal employees, said that it was prepared to “set up picket lines at strategic locations such as ports,” as per the Globe and Mail. In other words, frustrated by a lack of progress on negotiations over the past week, the union is now threatening to slow the flow of trade as causing greater economic damage could force concessions from Prime Minister Trudeau. It is a challenging situation, both politically and economically speaking. The union has asked for a 13.5% pay rise over three years, which exceeds the rise in the cost of living, and pushed for no return to office work. The government, meanwhile, has offered 9% over three years and 2 days per week back in office. If the government were to acquiesce, this could fuel a wage-price inflation spiral, especially if private sector workers follow suit. But not coming to the table will only draw out the bitter feud, ratchet up the immediate hit to economic output, and put strain on the supply-and-confidence agreement between the centre-left Liberals and left wing NDP. Faced with greater downside risks to growth and upside risks to inflation, it is difficult to see the Bank of Canada being pleased with these developments either, in its attempt to engineer a return to 2% inflation without causing a recession. In other news, Deputy PM Freeland expressed reservations toward a takeover attempt of Teck, a Canadian mining firm, by Glencore, a Swiss competitor, which mining analysts say could transform the Canadian mining industry. Today, nothing of note is on the Canadian economic calendar.

FX elsewhere

The Hungarian Central Bank looks set to take some initial steps towards cutting rates in its monetary policy decision due later today. With the decision due at 13:00 BST, comments provided by the NBH’s Virag in recent days suggested that the Bank would look to cut the overnight lending rate, from its current level of 25%. The size of any cut is seen as an important signal for the pace at which the NBH will look to normalise policy, and with HUF a significant beneficiary of appreciation pressure on the back of carry trades due to high policy rates, any shift in policy could bring with it a substantial move in the forint.

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