News & Analysis


FX markets spent yesterday unwinding much of Tuesday’s dollar selloff as the weaker than expected PMIs ultimately came from a high base rate of growth in the US. For reference, the Atlanta Fed downgraded their GDP tracker for Q1 yesterday to 2.7%, although this is still above estimates for today’s advance GDP print of 2.5%. Concerns that the US growth backdrop remains resilient even in light of marginally weaker data in recent days fuelled tepid demand at yesterday’s $70bn 5-year Treasury auction, which despite attractive valuations, cleared 0.6bps higher than the prevailing market rate. Together, this was enough for the Treasury curve to bearishly steepen yesterday, with 10-year yields closing at year-to-date highs.

In FX markets, the move in yields and the generally flat session in equities was enough for the dollar to recoup half of Tuesday’s PMI-induced slump. However, the dollar moving higher on the back of stronger longer-dated Treasury yields meant naturally USDJPY was back in focus for markets. With the pair now crossing over the 155 level, markets resume watching for signs that the BoJ will intervene to strengthen the yen just a day before their next scheduled policy announcement. While the yen’s breach of the 155 handle has been somewhat quicker than we anticipated, we don’t think the speed of the move is disorderly enough to warrant the Bank to intervene directly. Instead, we suspect the latest leg of yen depreciation is enough to move the needle for the BoJ tomorrow, with staff likely upgrading their inflation forecasts and Governor Ueda likely to compound that with hawkish guidance on rates and the yen. This should lead USDJPY to partially retrace and lower the potential ceiling for the currency pair.

Even so, the next 48 hours are fraught with risk for weak JPY shorts. A continuation in the yen’s slump to the 156-157 region, fuelled by stronger US GDP data and a firm PCE reading on Friday for March, will likely be sufficient for the BoJ to characterise the move as disorderly and physically intervene in markets. This scenario is increasingly realistic should the BoJ’s hawkish rhetoric on Friday morning have limited impact.

Today’s advance GDP report and Friday’s PCE report aren’t just important for USDJPY, but the broad dollar as a whole given it is the last top-tier data released before next week’s Fed meeting. Of importance within the data is what is the source of strength within the core data, and as a result its durability, as well as data on the health of the consumer. Currently, with less than two rate cuts priced for the Fed this year, markets are expecting both sets of data to show strong growth and inflation persistence. Anything to the contrary risks the dollar’s recent rally unwinding.


Eurozone bond yields followed Treasuries higher yesterday, fuelled by comments from Bundesbank President Joachim Nagel who stated that a June cut doesn’t necessarily kick off a series. This saw EURUSD spend most of yesterday’s session trading close to the 1.07 handle despite a backdrop of broad dollar strength, having originally reached these heights in the aftermath of Tuesday’s PMI reports. Against our expectations of EURUSD trading in a one-point range of 1.06-1.07 this week, the single currency has broken higher this morning on the back of a broadly softer dollar, although we suspect current levels will be short-lived if US data lands in line or slightly firmer than expectations over the next 36 hours.


Wednesday trading saw some more muted sterling price action after a busy start to the week. Whilst a rally in Gilt yields was notable with both the 2Y and 10Y Gilt yields adding 10bps, this largely matched similar moves elsewhere across bond markets, leaving GBPUSD and GBPEUR tracking sideways. This morning, however, sterling is back on the front foot against the dollar ahead of US Q1 GDP that is set for release later today. On the domestic front though, only CBI sales data is set for release, which should keep price action on crosses subdued barring any unexpected surprises.


A disappointing set of retail sales data saw USDCAD more than unwind its post-PMI fall on Wednesday, before ultimately retracing lower to finish the day up by only three tenths after BoC meeting minutes tilted hawkish at the margin. Turning first to the data, headline retail sales shrank by -0.1% MoM in February, undershooting expectations for a  0.1% print. Core sales also printed soft, contracting by -0.3%MoM. As we see it, this is consistent with our view of the Canadian economy, suggesting that tight policy is now weighing heavily on activity. Moreover, taken together with inflation that is now back to target on many measures and signs that the labour market is beginning to unwind, we also think this argues strongly in favour of the BoC beginning to ease rates. This was not a view shared by some on the Governing Council at the most recent policy decision, however. The April summary of deliberations indicated that a number of members felt that inflation remains too high, with upside risks still a concern. This was also despite noting that the economy remains in excess supply, and that the labour market is beginning to loosen, both of which should weigh on inflation in the coming months. Admittedly though, the April policy meeting did take place before March inflation data was released. With this showing a further slowdown in price growth, we still think a June rate cut is on the cards, and as such are inclined to discount some of the hawkishness seen in this latest set minutes. In our view, this should now focus significant attention on April’s CPI data, the last inflation reading that the BoC will receive before the next rate announcement on June 6th. As we see it, a further slowdown in inflation momentum is likely based on economic fundamentals, and should be sufficient to see the BoC cut rates in June based on this latest set of communications. Given this, market expectations that see just a 55% chance of a June rate cut look far too hawkish in our view, leaving USDCAD risks skewed towards a move higher, in line with our forecasts for the pair to trade in the 1.38-1.40 range heading towards the back end of Q2.



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