News & Analysis

USD

After drifting modestly higher throughout the early part of the week, the dollar eventually came under pressure yesterday as initial jobless claims and continuing claims data came in higher-than-expected. While the data seldom causes big market moves, yesterday it triggered a broad sell-off in the dollar as it was the only notable data point out of the US this week and also compounded the signal from last week’s softer payrolls data. Ultimately, the dollar DXY index fell 0.3% on the day, almost wiping out its gains for the week as the cross-asset environment turned risk-on with yields tracking lower and equities higher following the data. Nevertheless, while yesterday’s data adds pressure to our bullish dollar call, we remain hesitant to flip on the greenback just yet. After all, weekly jobless claims data are notoriously noisy and yesterday’s spike was almost entirely driven by a rise in claims in New York, potentially due to the end of the academic year.

Despite the move in the broad dollar following the initial jobless claims, most currencies traded well within recent ranges – a theme we expected to dominate this week given the vacuum in the US data calendar ahead of next week’s inflation data. The only major breakouts occurred within LatAm currencies, due to idiosyncratic factors. Both the Chilean peso and Peruvian sol ranked at the top of the expanded majors, rallying 1.35% and 0.92% respectively, while the Brazilian real gapped -1.5% lower at the open as traders reacted to the contentious BCB decision on Wednesday evening before moderately trimming losses to close -1% lower on the day. The general story in Latin America is a growing level of caution over further easing, which in recent days has led the BCB to slow the pace of easing, Banxico to embark on a hawkish hold, and markets to turn more hawkish on the BCCh. While for both MXN and CLP, this has proven supportive of their currencies as investors continue to favour high-yield in Latin America, for Brazil this stance has raised concerns over another clash between the monetary authority and the government. However, not all central banks in the region have turned more hawkish. Yesterday the BCRP in Peru continued to cut rates by 25bps and further guided markets towards further easing despite narrowing yield differentials with the US and a highly dollarised economy. This should lead the Peruvian sol to underperform today when markets open, accompanied by BRL as investors continue to sound caution over the risk to monetary independence in Brazil.

Looking ahead to today, the main events in markets are likely to be the swathe of Fed speakers beginning at 14:00 BST with Bowman and Canadian jobs figures at 13:30 BST. On the jobs figures, we expect another weak print to usher in further divergence in monetary policy, an outcome that could have broader implications across DM rates and FX.

EUR

The single currency caught a bid yesterday, triggered by the US jobless claims data that extended the narrative of softer labour market conditions in the US. Despite closing 0.3% higher on the day, however, the single currency remained well within recent ranges, where we suspect it will continue to trade heading into the weekend. Today, the only notable data point is the publication of the ECB’s meeting minutes at 12:30 BST. While there is a risk they include more details on the brewing debate over a second cut in July, given how cautious policymakers have been in recent weeks, we doubt much more guidance will be forthcoming in the minutes. If our expectations are realised, we suspect EURUSD will close the week trading in the midpoint of the 1.07-1.08 range.

GBP

A busy couple of days for sterling traders kicked off yesterday with a closely watched BoE decision. While no change in rates was expected or delivered, policymakers were expected to give some indication on the timing of future rate cuts. On this point, the MPC left its options open over the start of easing, with both June and August meetings still on the table. But Governor Bailey did offer some notable pushback against market pricing when it came to the pace of cuts, suggesting that the Bank could well cut faster than markets currently envisage. All told, while this was dovish at the margin, it is in line with our base case for an initial cut to come in August, followed by successive cuts for the remainder of this year. It was also not quite as dovish as some in markets had feared. As such, while sterling softened modestly on the Bank’s decision, the move was moderate and more than offset against the dollar by a weak initial jobless claims print. This left GBPUSD to finish Thursday up two tenths, whilst easing only a fraction against the euro.

While the BoE may have kicked off the excitement for GBP watchers, this morning’s GDP print is equally of note. According to this latest release, the UK economy expanded by 0.6% QoQ in Q1, above pre-release estimates that had looked for a 0.4% print. Not only did this more than fully erase the contraction seen in the second half of last year, but we also suspect that it puts a notable dent in the calls for a June start to policy easing, even in spite of yesterday’s communications. Specifically, the BoE noted that a key factor that would allow them to cut rates was a slowdown in demand that prevented rising wages from translating into higher inflation. This is hard to square with an economy that is growing faster than expected, and particularly with the expansion in services activity which rose 0.7% in Q1, and 0.5% in March alone. With PMIs indicating that this strong growth momentum is set to continue into Q2, accompanied by rising real wages, we think this leaves risks to UK growth skewed to the upside, weighing strongly in favour of a cautious approach to the start of easing from the BoE.

CAD

The Canadian dollar rode the wave of improved risk sentiment yesterday, unimpaired by the outcome of the Bank of Canada’s financial stability review, which on the whole sounded alarm about the stability risks associated with the BoC holding rates at current levels for an extended period of time. Today, the domestic calendar should be more instrumental for the loonie, however, as traders receive the final labour force survey ahead of the BoC’s June 5th meeting. We suspect the data will once again highlight weakening cyclical conditions in Canada, with employment continuing to struggle to keep pace with overall population growth, leading the unemployment rate to continue rising and wage growth to soften further. Should this transpire, we expect market pricing of a BoC cut next month to increase from 66% currently, with traders also likely to raise the probability of a second successive cut in July from just 57% too. Together, this widening in US-Canadian yield spreads should weigh on the loonie, but the data may fall short of triggering a move north of this month’s high in USDCAD (1.3784) as easing bets are unlikely to rise too substantially ahead of April’s inflation report (released May 21st).

 

 

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