News & Analysis


While markets continued to speculate on fewer rate cuts from the Fed yesterday, leading 10-year Treasury yields to chart fresh year-to-date highs as they climbed above 4.35% and equities to drop close to a percent, this didn’t extend the dollar’s rally. The DXY index sank 0.2% yesterday as the move in Treasury yields was superseded by the rally in yields elsewhere as markets reopened from the long weekend. Commodities also played a role, with the Norwegian krone rallying a percentage point as oil cracked through $85 per barrel for the first time since October, however, the positive spillovers weren’t that broad as both the Brazilian real and the Canadian dollar failed to make inroads yesterday.

The reluctance within markets to take the dollar higher despite the backdrop of two voting Fed members, Mester and Daly, reiterating a cautious tone on rate cuts and this lack of urgency reflected in only a moderate decline in job openings in February was notable. Whether or not FX markets continue to trade in ignorance of this today will depend on the ISM services PMI. Released at 15:00 BST, a similarly inflationary print to the manufacturing index earlier in the week will likely force markets to continue pricing in higher neutral rates in Treasury yields, weighing on equities as a result. Unlike yesterday, we suspect this will lead the dollar higher, especially as it is set against data out of Europe showing a clearer disinflation path for the ECB and thus greater divergence in monetary policies. Also on the agenda for markets today is Chair Powell at 17:10 BST, while Bostic, Bowman, Goolsbee, Barr and Kugler are also scheduled to speak from 13:30-21:30 BST.


Germany followed Spain, France, and Italy in producing a below-expectations flash inflation print for March, suggesting risks to the eurozone reading today at 10:00 BST are tilted to the downside. As we had been warning, eurozone economic conditions are now reflecting clear signs of cyclical weakness, which is now being reflected in underlying inflation momentum. While the ECB seems adamant that it needs Q1’s wage data to confirm this before beginning to cut rates, we think this delay reflects a policy error, one that should lead EURUSD to carve lower as it becomes apparent that the ECB will need to cut rates quickly to catch-up with the economy in 2H24. However, this isn’t necessarily reflected in markets as of yet. Not only is there a reluctance to take EURUSD below the 1.07 handle in spot markets, but in the options space, risk reversals continue to show a relatively neutral skew, suggesting speculation over a significant decline is limited.


In a trading session dominated by rates, the UK was a standout yesterday, adding 7bps to 2 year Gilt yields and 15bps to the 10 year. That said, with yields climbing across the board, price action for sterling remained somewhat muted. The pound gained two tenths against the dollar and dropped marginally versus the euro, ultimately underperforming the relative moves in the rates space. Looking forward, a blank data calendar is likely to see GBP price action remain limited once again today, before tomorrow’s Decision Maker Panel and PMI revisions come into focus for markets. Inflation expectations recorded by the former have proved sticky of late, and we see little reason for this to differ on Thursday. Meanwhile, if yesterday’s upwards revision to the Manufacturing PMIs are anything to go by, a modest upgrade to the services and composite PMIs is also likely. All told, this should offer a constructive backdrop for sterling on the domestic front heading into Friday, where a US jobs report remains the main event of the week for GBPUSD.


Despite the moves higher for yields seen elsewhere, Canadian government bonds found themselves standing on the sidelines during yesterday’s trading session. Curiously, so too did the loonie, with USDCAD finishing the day virtually unchanged despite a notable climb higher for oil prices. WTI added close to 2% yesterday, extending a rally that has seen prices climb by close to 10% since mid-March, with almost 6% of that coming in the last four trading sessions alone. Yet despite this, the loonie has struggled to find its typical oil beta, in contrast to the similarly oil sensitive NOK, which rallied by more than 1% against the dollar yesterday. The negative equity backdrop likely explains this underperformance; with the NASDAQ index falling close to a percent on the day, traders likely sat on their hands over North American risk assets as a whole, CAD included. Canada’s fundamentals also support such a view. As we have previously noted, inflation has largely disappeared, labour market slack is growing, and output is declining on a per capita basis. With this likely to be highlighted once again in the PMIs later today, before Chair Powell hits the airwaves this afternoon and jobs data on Friday shines a bright light on the growing economic divergence between the US and Canada, traders also appear cautious of taking the loonie higher against this less than constructive backdrop.



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