News & Analysis


In a day that saw a broad rebound in the US dollar, the pound decided to steal the show. Sitting at the bottom of the G10 currency basket with losses in excess of 2% on the day, the pound finally snapped as markets were bludgeoned by the Bank of England into pricing a lower projected rate path and a higher probability of a recession next year. Releasing its latest policy decision and forecasts at midday yesterday, the Bank of England relayed to markets that it had overpriced the Bank’s projected tightening path via multiple different forms of communications. Firstly, the market-implied projections based upon a Bank Rate of 2.5% by mid-2023 saw inflation in three-years time fall substantially below the 2% target at 1.3%, meanwhile, under this assumption, the Bank of England expects growth to be flat next year. This highlights the risk to economic growth from overtightening, as implied by markets. Instead, the constant rate projections, based upon a Bank Rate of 1%, sees inflation falling back close to target over three years at 2.2%. The divergence in the inflation forecasts alone suggested that fewer hikes are necessary under their current projections, but this was further confirmed by the rate statement including that “most members” agree on some further tightening being appropriate at coming meetings. The shift from unanimity to “most members” suggests growing divergence within the Committee as at least one member now believes that rates should be held. In total, the pound is likely to continue to underperform the G10 as a whole, especially in the short term as markets overreact to the latest central bank meetings.


After a strong rally in the wake of the more dovish Federal Reserve meeting on Wednesday, the euro’s bullish balloon popped yesterday as US 10-year rates cracked fresh highs. The downside pressure on the single currency was so substantial, that not only did the euro wipe out Wednesday’s gains, but it sank back to levels last seen in 2017. This all came in spite of more hawkish commentary from the European Central Bank. This morning, with European equities opening in the red, the pressure on the euro hasn’t subsided. With little data due out domestically, the single currency is likely to continue to sit under pressure until April’s Nonfarms release at 13:30 BST, which could provide some dollar downside if it prints on the soft side.


Market volatility didn’t subside after Wednesday’s Fed-induced rally in risk assets as the move was quickly reversed and then some on Thursday. US Treasury yields were again the culprit for the broad market volatility: the two-year yield climbed 5 basis points back towards its pre-Fed high of 2.85%, while the 10-year climbed a whopping 10 basis points to smash through the 3% level. Rising rates and concerns over ongoing growth and inflation conditions sent risk assets tumbling yet again. The NASDAQ index tumbled nearly 5%, its largest daily loss since June 2020, while both the Dow Jones Industrial Index and the S&P 500 notched losses in excess of 3%. The combination of weaker equities and higher US yields fed back into the dollar in FX markets, with the greenback now sitting stronger against all G10 peers relative to Wednesday’s open. This morning, dollar upside persists as the US yield curve bear steepens (yields rise faster at the back-end of the curve than at the front-end). As the name dictates, this dynamic is usually bearish for the stock market in the near-term. US and European equity futures are pointing to a lower open this morning. All of this comes ahead of April’s Nonfarm payrolls release at 13:30 BST, which is expected to continue showing robust job gains, albeit at a slower pace of 380k vs March’s 431k boost. More importantly, the participation rate is expected to rise by 0.1 percentage point to 62.5%, with wage growth sitting stable around 5.5%.


Despite the rise in front-end Canadian bond yields exceeding that of the US, thus narrowing the USD positive front-end rate differential, the Canadian dollar traded on the back foot for most of yesterday’s session. This is largely due to the impact rising US Treasury yields had on cross-asset pricing, which tends to also have a big influence on how the Canadian dollar trades. The signal sent across all markets was one of risk aversion, as US equities crumbled under the pressure of higher rates. This sent the US dollar bid across the G10 board, with the Canadian dollar no exception despite the CAD positive yield spread developments. This morning, with US Treasury yields rising further and US equity futures pointing to a lower open, the Canadian dollar is under the pump again. However, unlike in yesterday’s session, the loonie can potentially find some support in the release of domestic data today. Released alongside the US Nonfarm payrolls report is April’s labour force survey at 13:30 BST. Unlike in the US, employment gains in Canada are expected to be much lower at just 40k. But at that speed, the net increase in employment still outpaces pre-pandemic averages. With indicators such as the unemployment rate suggesting a record level of tightness in the Canadian job market, focus will be on how this translates into higher wages for workers and whether the favourable employee conditions suck more potential workers into the job market.



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