News & Analysis


Yesterday’s session was dominated by speculation over whether the Bank of Japan did in fact end up intervening in FX markets, with Dow Jones newswires reporting that “sources” confirmed the action. Nevertheless, the damage had already been done, not only in USDJPY but also in most other dollar pairs, leading the greenback to slump just shy of half a percent on the day. As we noted yesterday, the moves across most currency pairs weren’t necessarily consistent with the evolution of the data, specifically EURUSD which rallied even as inflation data came in soft for both Spain and Germany. It seems as if economic reality has now caught back up with traders, leaving the dollar back in the ascendancy this morning.  Whether this lasts or not will now be determined by the economic data calendar, which in the US incorporates the Fed’s preferred wage measure, the employment cost index. Expectations are for the ECI to tick up marginally from 0.9% to 1% QoQ, a level that if achieved would leave inflation conditions too hot for the Fed. Also in focus is eurozone inflation and GDP data. Currently the ECB have formed unity around a rate cut in June, but the hawks and the doves are still hotly contesting July’s decision. A hotter-than-expected round of data, which isn’t our base case, could keep EURUSD’s head above the 1.07 handle and maintain pressure on the greenback ahead of tomorrow’s Fed meeting.


A common theme over the past 24 hours has been European inflation data undershooting expectations on a national measure but moderately exceeding expectations on a harmonised basis. The same can be said for the French figures this morning, which landed at 2.2% but beat expectations by 0.2pp to print flat at 2.4% once harmonised. Thus, with both the French and German figures moderately exceeding expectations, the risks to the eurozone HICP measure at 10:00 BST are tilted to the upside. Should this risk crystallise and the GDP figures for Germany and Italy follow the French and Spanish numbers in beating expectations at 09:00 BST, the debate over the ECB’s next steps beyond June is likely to remain contested. This lingering uncertainty should keep EURUSD somewhat insulated from any hawkish outcomes in the US data this week and could see EURUSD finish the week above 1.07.


The pound notched some decent gains to start the week, rising six tenths against the dollar and three tenths against the euro in a Monday session with little domestic news to offer for GBP traders. The dollar dynamics that led moves yesterday have continued overnight too, with sterling down 0.3pp in early trading against the greenback as USD retraced some of yesterday’s losses. Nonetheless, this morning has also brought with it a handful of UK data points of note. The Lloyds business barometer for April remained unchanged at 42, but interestingly the own price expectations reading rose from 57 to 60. While in isolation this would point to a rising prices, the the BRC shop price index, also released this morning, told a different story. This alternative measure showed prices rising by just 0.8% YoY in April, down from 1.3% in March and similarly undershooting expectations for an unchanged reading of 1.3%. Admittedly the two readings do not exactly overlap in what they measure, which might go some way to explaining this discrepancy. For markets through, the muddled readthrough appears to have seen both readings discounted as net-neutral for the time being. Later today, consumer lending later is likely to be similarly unimpactful for sterling barring a significant miss. This should keep events elsewhere, in particular European inflation and growth figures, and tomorrow’s Fed meeting, as the focus for GBP watchers.


The loonie struggled for direction against the dollar through Monday’s trading, even as other G10 currencies were busy posting sizable gains. While CAD did ultimately manage to nudge up just a fraction by the close of play, we think the loonie’s relative performance against the dollar is more instructive of traders’ view on the currencies long term fundamentals. Growth in Canada is weak, inflation is back to target and policy looks overly tight. All told this is not a constructive backdrop. The first of these points is set to be tested today too, with February GDP figures due for release at 13:30 BST. While annual growth figures are expected to improve to 1.1%, up from the 0.9% growth seen in January, economists are anticipating a slowdown in growth on a monthly basis from 0.6% to 0.3%. While these figures may look reasonable at first glance, we are inclined to not read too much into Q1 growth numbers at present. Support from the end of the public sector strikes and unseasonably mild winter weather means this strength is unlikely to be sustained into Q2. In any case, even a print that matches expectations is poor performance for an economy that’s population is growing at 3% per year. As we have noted previously, this would still leave the economy with a negative output gap, a dynamic that should continue weighing on inflation. That said, a positive headline number might be enough to see the loonie bounce today, even if the fundamentals are somewhat less constructive. Instead of the growth data, however, we think the key for the loonie this week is likely monetary policy communications with a Fed announcement due tomorrow and the BoC’s Macklem and Rogers speaking in Parliament on both Wednesday and Thursday. We see a significant risk of a sharp contrast in rhetoric, with a high for longer Fed stance set against a more dovish BoC outlook. All told, this could finally be the catalyst to see BoC easing expectations detach from the Fed’s an outcome that could take USDCAD sharply higher in the next few days.



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