News & Analysis


FX markets have been fairly uneventful over the past two days, with most major currency pairs trading in tight ranges given the sparse economic calendar. However, the overnight session has been of intense focus given the potential of USDCNY and USDJPY to breakout to the upside; moves that will have implications not only for Asian FX on the whole but also the broad dollar. While the ceilings on the quasi-pegs have held thus far, markets also haven’t had a fundamental reason to test policymakers’ resolve. That could soon change as tonight sees arguably the marquee event of the week, a speech by Fed Governor Waller. Having spoken on behalf of the core of the FOMC over recent months, guiding markets towards easing and then the subsequent delay in the start of cuts, Governor Waller’s tone tonight will be crucial. Should he sound more cautious than Chair Powell and stress the upside risks to the inflation path, markets are likely to continue pricing a shallower easing path for the Fed. This should lift back-end Treasury yields, with the 10-year trading just 12bps below its year-to-date highs, providing traders with the perfect excuse to add to long dollar positions against low-yielding currencies like CNY and JPY. This would put intervention risk firmly back on the table, especially in Japan where vocal intervention has amplified after USDJPY hit levels not seen since 1990 overnight. That said, risks are two-sided. Another vote of confidence from Waller tonight will likely prompt a mini relief rally in markets, leading the dollar to partially retrace.


Price action in the euro at the start of the week highlights how divided the market is following last week’s Fed meeting. Having initially rallied on Monday, the single currency floated lower yesterday, trading in an incredibly narrow range of 0.37%. Sitting just north of the 1.08 handle, the single currency shows no signs of breaking out in either direction just yet as neither the bulls nor the bears are satiated. We continue to sit bearish on the single currency on the view that the ECB is keeping policy overly restrictive, risking an elongated stagnation or even a slight recession. Spanish inflation data this morning gives us greater confidence in this view. While the headline measure jumped from 2.8% to 3.2% YoY, this was largely due to a VAT rise in electricity alongside base effects. What is more crucial, however, is the larger-than-expected decline in core inflation, which fell from 3.5% to 3.3%. This comes even as base effects for core goods flip positive, suggesting that underlying inflation conditions in one of Europe’s fastest growing economies continue to soften. If this is confirmed in the French data on Friday and the German figures next Tuesday, especially given both respective economies are producing considerably lower growth than Spain, pricing of the ECB’s easing cycle beyond June is likely to ramp up from 3.6 cuts currently predicted.

Following yesterday’s NBH decision and the 0.45% rally in EURCHF to our previous three-month forecast, European traders are likely to have their attention trained outside the eurozone, though on this occasion it is a Riksbank decision in focus. No change is expected by Swedish policy makers on this occasion, but traders will be looking for any confirmation, or lack thereof, on the prospects of a rate cut at the next meeting. Swap markets have seen a buildup in bets for in May over recent weeks, with this weighing notably on the krona. A hint from policymakers in this direction could well see this move extend, and could see EURSEK breaking to the upside having traded largely range bound so far this year.


Tuesday proved another quiet day for sterling in advance of the Easter break. The pound traded sideways against both the dollar and the euro, offering little for traders to write home about. The only significant event of note for UK watchers came from the BoE’s Catherine Mann, suggesting that markets are pricing in too many rate cuts this year. That said, this was hardly a surprise. Given her reputation as the BoE’s resident hawk, anything else would have been shocking. Today, the Lloyds business barometer published just after midnight has offered a modest boost to sterling with a marginal upside beat. All told though, with a sparse data calendar running into the bank holiday weekend, sterling price action looks set to stay subdued.


Even in spite of an intervention by the BoC’s Rogers yesterday, USDCAD still found itself ending the day broadly where it started, with only muted volatility in the pair. In terms of Rogers comments on monetary policy, she largely echoed Mackelm’s prior remarks and the contents of the summary deliberations, turning her speech on Tuesday into a non-event for markets. Even so, this arguably should have been positive for the loonie at the margin, with risks in advance of the event having been skewed towards a more dovish tone. As such it was interesting to see CAD once again struggle to make any sustained headway despite what should have been supportive news flow. The focus for loonie traders now turns towards a speech by Fed Governor Waller later today, before tomorrow’s GDP release where markets are expecting a robust print for the January data. While the initial bias for markets tomorrow is likely to be in favour of loonie strength on the decent headline growth numbers, we would caution against reading too much into this. Specifically, the Canadian economy still remains in a per capita recession, a dynamic which should be weighing on demand, with only robust population growth masking the underlying economic weaknesses.



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