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GBP
In contrast to the US, market moving data out of the UK was light over the course of yesterday’s session. Despite this, or perhaps because of it, sterling initially rose through a key psychological level (a 10-month high) on nothing but technicals (aka market boredom) before retreating. For now at least, markets do not seem to see new highs in the pound as sustainable from a fundamental basis, but the jobs data coming later this month may well tip the balance. However, with sterling ripping higher, it raises a question as to whether the UK is more investable than the US right now?
We think so, at least until we see recession concerns in the US abate. This is predominantly because of the cheaper valuations of UK assets, specifically equities, and the more stable equilibrium for UK rates seeing as the Bank of England has likely called an end to its hiking cycle without forcing renewed recession fears. As markets come round to this view, it could well provide an appreciative dynamic for the pound in coming weeks. Where markets did not find support for a further push higher in sterling yesterday, was in comments by BoE Chief Economist Huw Pill. As a centrist member of the MPC, his views are seen as indicative for the outcome of the May rate decision. His talk yesterday saw Pill playing his cards close to the chest, and with markets pricing the upcoming rate decision as a tossup, there were points for both sides to hang hats on. Whilst pointing to upside risks to inflation and stressing the need to “see the job through”, he also noted that there were no signs of inflation being driven by firms profiteering, or by excess wage rises; a key concern for policymakers. In our view it is this latter point that is most important. Assuming it is confirmed in this month’s data, then it would continue to support our call that the BoE is poised to terminate its hiking cycle in May.
EUR
While hawkish comments from some ECB members in the past few days hasn’t seen money markets fully price a 25bp hike at the May meeting let alone the probability of another 50bp hike, and for obvious reasons given the ECB has now retired its forward guidance, it is providing a floor under eurozone rates during the dovish repricing in US rates. In our view, we expect this narrowing in US-Eurozone rate differentials to continue to be a supportive driver of EURUSD over the medium-term, especially as the economic cycle in mainland Europe is currently lagging the US by around six months. With little in the way of data scheduled today beyond some industrial production figures and final PMI readings, the emphasis for the currency pair will likely rest on the US data and whether it continues to signal a sharp slowdown in the US economy. Some attention will be given to commentary by ECB Chief Economist Philip Lane at 15:00 BST, but similar to recent ECB speakers this is unlikely to move markets.
USD
Economic fundamentals continued to drive FX markets yesterday as data on the number of job openings in February dropped considerably for its second consecutive month. Showing that 9.931m job openings still exist, down from 10.563m in January, the JOLTS data is still overestimating the overall level of labour demand within the economy. Nonetheless, the Fed has been waiting for the measure to start moving lower after it trended above 10.5m for the whole of Q4 as the unemployment rate started to carve fresh lows. With signs of progress in the recalibration of the labour market now becoming apparent, the data once again highlights that previous monetary actions are starting to be felt within the real economy. However, similarly to the ISM manufacturing measure on Monday, the data doesn’t reflect the continued tightening in monetary conditions following the regional banking crisis in March and the Fed’s 25bp hike. By showing the economy was already slowing beforehand, the data merely confirmed the markets priors: a hard landing for the economy that will lead the Fed to begin its easing cycle as early as the second half of this year. Following the release, the yield on the 2-year Treasury fell by 15bps as the number of rate cuts priced this year for after the May meeting extended to 80bps. While rates fell, this didn’t offer any support to US equities given the dovish repricing was driven by a more negative growth outlook. Most major US indices closed 0.5-0.6% lower on the day. Within the FX space, the dovish repricing also weighed on the greenback. The DXY index closed 0.41% lower on the day, with the dollar experiencing its most significant losses against rate-sensitive currencies (SEK, JPY, CHF) and high beta currencies (GBP, HUF).
Today, the focus will be on the ISM services measure at 15:00 BST. The measure has consistently outperformed the manufacturing index since mid-2021 and as of February was still showing a healthy US service sector with a reading of 55.1. Should the services measure exhibit the same harrowing signals as other recent data points, we expect the broadly isolated dovish repricing in US rates to persist. This would only exacerbate the decline in the dollar ahead of Friday’s payrolls print. On that note, markets will also receive the ADP private employment figure for March at 13:15 BST. But, even after the measure was tweaked to try and fit the BLS payrolls data better, it is still a poor predictor. Whether markets fully discount the reading or not will depend on how much of a surprising figure is printed.
CAD
After the recent loonie rally extended to its longest hot streak in a year, we started to ask ourselves, “how much longer can this go”? As it turns out, not much. Yesterday’s trading day saw the loonie lag behind most other G10 currencies, and a tiny -0.1% daily loss was all it took to end the 6-day streak. The intraday swings in USDCAD tracked alongside similar dynamics in equities and oil, which were all collectively driven by US job openings data that suggested labour demand was falling and thus the US economy was slowing. Canadian building permits were also released yesterday, showing an 8.6% monthly improvement that well outpaced the 2% expected. Along with a slowing rate of decline in existing home sales, this suggests that the housing correction may be turning a corner. In other news, Bank of Canada Deputy Governor Paul Beaudry will be leaving the Bank, and returning to the University of British Columbia. We will be paying attention to see who is selected to replace him. It will probably be an internal promotion of a current advisor, although it could also be a managing director or someone external. Today, Canada’s international merchandise trade balance is the only data release scheduled, but it’s not a high-impact event for markets.
FX Elsewhere
Following on the heels of a hold in rates from the RBA early Tuesday morning, Wednesday brought the turn of the RBNZ. Whilst the RBA meeting had been viewed as a coin toss, with the RBA ultimately choosing to maintain their current policy stance, the decision out of New Zealand was almost universally expected to produce a 25bp hike. It was therefore a surprise to both analysts and markets to discover that the RBNZ, in sharp contrast to their Australian counterparts, was hiking by a larger than anticipated 50bp. The decision was spurred by a view that inflation remains “too high and too persistent”, with the RBNZ taking some time to address concerns around financial stability, suggesting that the NZ economy is not at risk from the kind of recent banking troubles seen elsewhere in recent weeks. This most recent tightening of policy brought the official cash rate to 5.25% and led NZDUSD more than 1% higher on the news before giving back some gains, with the relative deviation in policy driving AUDNZD over 1.5% lower since the announcement of the RBA decision just over 24-hours ago. The extent to which this divergence persists, will depend on the path of monetary policy moving forwards. It was in this context that RBA President Lowe spoke, just following the RBNZ announcement. With Lowe suggesting that further rate rises may be on the table in Australia despite the current pause, and analysts expecting further tightening from the RBNZ, the potential for policy to drive antipodean currencies seems likely to continue as a theme in coming months.