News & Analysis


Despite very little in the data calendar, yesterday still managed to provide something to watch for markets, with comments from the Bank of England’s Ben Broadbent and Huw Pill hitting the airwaves. The lesser heard Broadbent, speaking at the University of Cambridge at an event hosted by the National Institute of Economic and Social Research, played his cards close to his chest, as expected. His remarks did appear to lean in a slightly hawkish direction, suggesting a bias towards a hike at the upcoming May meeting, but this was not exactly informative for markets. With option implied expectations suggesting a further two and a half  rate rises on the cards, and almost all analysts upgrading calls for the early May meeting to a hike on the back of strong wage and inflation data last week, Broadbent’s comments did little to catch the attention. This was not quite so true for Huw Pill, however. The Bank of England’s chief economist might feel a little aggrieved this morning about how he was quoted, with headlines stating that Brits ‘need to accept’ they’re poorer The comments, made in a  pre-recorded podcast, actually followed a trend in recent bank communications, pointing out that when as a country  “what you’re buying has gone up relative to what you’re selling, you’re going to be worse off”. Common sense for an economist perhaps, but open to misinterpretation by a public unhappy with their cost of living being squeezed. Despite this drama, and a relatively hawkish tone, markets continued to pare bets for the BoE’s terminal rate yesterday, as market pricing continued to converge towards analyst expectations for a 4.5-4.75% terminal rate. This move in rate expectations led sterling six tenths lower against the dollar on the day, dipping similarly against the euro before recovering to end the session flat. But for today, with little newsworthy information expected to drop, price action for sterling is likely to be driven, once again, by emerging developments elsewhere.


The single currency fell 0.6% against the dollar yesterday, marking another failed attempt to break out of its recent range in doing so. It wasn’t just financial stability concerns that weighed on the single currency, but also producer price inflation data out of Spain which highlighted how core goods inflation is likely to experience substantial disinflationary pressure in the near-term. With the ECB conditioning its rate path on the progress of core inflation, yesterday’s data saw expectations of a 50bp hike next week fall below the 30% threshold, although this is subject to change yet again on Friday’s inflation data. This morning, despite equity futures trading overnight in the red, the single currency is leading the G10 retracement against yesterday’s broad dollar move. Although this morning’s rally in EURUSD coincided with improving consumer confidence data out of France and Germany, in our view the renewed bullish momentum likely reflects a market rebuilding long positions at a better entry point given long euro remains one of the most stable and favoured positions amongst non-commercial players year-to-date. In terms of economic developments that hold the potential to extend the euro rally, just commentary from ECB Vice President Luis de Guindos at 13:00 BST stands out. Notably, de Guindos has a track record of overdelivering in terms of his commentary, having told EU finance minister last month that EU banks may be vulnerable just days before the ECB looked to reinstall confidence in the financial system by delivering on its previously signalled policy decision.

While events in the eurozone may not provide sufficient stimulus to push EURUSD to new year-to-date highs, European FX traders can still expect some fireworks today as the Swedish central bank is set to announce its latest policy decision at 08:30 BST. While consensus is fairly firm over a 50bp hike in the repo rate to 3.5%, the range of estimates remains wide at 25-75bps. The decision itself isn’t the only avenue that the Riksbank can induce some volatility in the krona, as markets will be paying close attention to its latest repo rate projections and any decision to speed up its quantitative tightening programme, which was introduced back in February to support SEK inflows. In our view, the Riksbank are unlikely to surprise on all fronts, hiking 50bps, signalling a further hike in June, and holding the pace of QT from February. Nonetheless, the central bank’s sensitivity to SEK and continued bouts of weakness since the last meeting may force a hawkish surprise.


Financial stability concerns rose back to the surface in yesterday’s trading session as the beleaguered Californian Bank First Republic saw its share price drop by 49% in yesterday’s session after it quoted after hours on Monday that it had lost $100bn of deposits during last month’s turmoil. While the sell-off was relatively contained to First Republic, the turmoil in the bank’s share price reminded markets that the period of relative calm wasn’t a sign that financial stability concerns had completely dissipated. Risk assets generally felt the pain with the S&P 500 closing 1.58% lower on the day, while in FX markets the dollar benefitted from a haven bid which dragged it back off of the lows of its recent range. As expected in this environment of lower yields and equities, the Japanese yen also benefited from haven demand.

Just as the decline in First Republic’s share price reminded markets that the outlook for the Fed’s policy path remained mired in downside risks, so did anecdotal evidence from clothing retailer Gap. Announced yesterday, Gap was set to eliminate 500 corporate jobs, mostly in its headquarters in San Francisco and New York, with the news compounding earlier corporate layoffs in major tech names. While this is yet to filter through into the headline payrolls data, it is yet another sign that the US economy is cooling and that slack should start to re-emerge in the labour market; a key dynamic that should weigh on inflation over the medium term. Today, given the focus on the health of the US economy, markets are likely to pay increased notice of second-tier data releases such as the MBA measure of mortgage applications at 12:00 BST and retail inventories data for March at 13:30 BST.


The loonie took a beating on Tuesday, weakening by -0.6% against its American counterpart. The size of the fall was in line with those seen in the euro, sterling, and Swedish krona. It could have been worse, though, as far more substantial weakness was seen in the Norwegian krone, another petrocurrency. For the most part, yesterday’s weakness in the Canadian dollar was driven by a rotation to safe haven assets, but a -2.2% drop in the price of oil wasn’t much help either. The USDCAD pair broke through several technical resistance levels, maintaining the upward momentum that began halfway through April. Today, we will be receiving the Bank of Canada’s latest meeting minutes. We know that the Bank of Canada is on a conditional pause with a greater inclination to raise rather than cut rates later this cycle, but Macklem may try to thread the needle by suggesting that rates simply need to be kept where they are for a longer period of time. Today’s minutes could get us a bit more insight on that front, although we won’t get our hopes up. We are also looking to get more information on how the Governing Council viewed last month’s global banking crisis, which remains a hot topic today as we note in the USD section.



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