News & Analysis


Unlike Wednesday’s session, higher Treasury yields following stronger US inflation data managed to spark a broad rally in the dollar yesterday, arguably because it coincided with a second weak retail sales report this year to drag equities lower and produce a traditional risk-off session across assets. The fact US yields are now much closer to their YTD peaks relative to Wednesday likely fuelled this outcome for risk assets too, as markets are now factoring in the credible risk that disinflation progress in the US stalls from here, leaving any Fed easing limited if at all. We think this is the correct read of yesterday’s data, as stronger core CPI and PPI data means the working assumption of the Fed’s favoured inflation measure, PCE, has been raised at a time when the US consumer is showing signs of fatigue after core retail sales printed flat in February following a 0.3% contraction in January. This has material spillovers for the Fed’s dot plot projection next week. While we think the median dot is unlikely to change from displaying 3 rate cuts, the distribution around the median may skew in a more hawkish direction to reflect the recent strength in inflation data.

While the US data has garnered some decent attention this week, the standout currency for markets has undoubtedly been the Japanese yen as speculation over a BoJ hike next week has been rife. News overnight that Japan’s largest trade union have secured average annual wage increases of 5.28%, up considerably from the initial 3.8% last year, has only added to that speculation. However, as we note in our BoJ preview set to be released over the weekend, there are still reasons for the BoJ to hold out until April. That, as well as the fact the central bank has underwhelmed markets on multiple occasions over the past 16 months, has left positioning on potential BoJ action in JGB futures and the options space below levels seen in advance of last year’s Q1 meetings. This level of caution is once again visible in spot markets today, with the yen struggling to consolidate its rally following the JTUC-Rengo news.

Today, with little now set to be released ahead of the weekend, traders are likely to turn their attention to next week’s events, where the data calendar is jam packed full of central bank decisions. In the G10, six central banks are set to announce their latest decisions, with markets anticipating material changes in policy from two – the Bank of Japan and the Swiss National Bank. Furthermore, both the central bank of Brazil and Banxico meetings are live for markets. In the case of the former, while a 50bps cut is almost a certainty, the question is whether the Bank changes their forward guidance of a sustained pace of easing given the recent surge in inflation. For the latter, we think Banxico are likely to hold rates given the prominence of upside inflation risks, but the decision whether or not to cut at this meeting is finely balanced.


The combination of higher US yields and weaker equities finally weighed on EURUSD yesterday, sending the currency below the 1.09 handle and out of its 0.72% trading range for the week. The currency ultimately fell 0.6% on the day due to dollar dynamics, but developments in the eurozone were also net negative for the euro. As we noted yesterday, the head of the Greek central bank warned of a more aggressive easing cycle on the basis the ECB delays rate cuts until June, and while such topic of discussion was avoided by ECB Executive Board member Schnabel yesterday, who primarily focused on explaining the technical adjustments from the ECB’s operational framework review on Thursday, his comments shone the light on the left hand side tail risk for eurozone rates just as markets focused on the right hand tail for US rates. As we have noted in recent weeks, should the data continue to evidence that the ECB has kept policy too tight for too long in the coming months, while the US data continues to cause concern over Fed easing, a more accelerated easing cycle in the eurozone should weigh further on EURUSD.

Today, the main event for euro traders is a speech by ECB Chief Economist Philip Lane at 13:30 GMT. Like Schnabel yesterday, Lane could avoid giving too much colour on the future path for rates, however, given the ECB have stressed recently that they have alternative wage measures that they are focusing on and haven’t categorically ruled out an April cut, any suggestion by Lane that wage pressures are cooling faster than previously expected could cause eurozone rates to fall, extending the euro’s losses on the week from 0.65% currently.


As with every other major currency on Thursday, sterling slid against the dollar, a move that ultimately saw GBPUSD giving up 0.35pp. Even so, this still left the pound top of the pack amongst G10 FX, reflecting what we see as sterling’s relatively more attractive fundamentals. Whilst both inflation and wage growth are cooling, they remain elevated when compared across developed economies, a fact that should see the BoE keep rates on hold until the second half of the year. Similarly, economic activity expanded in January, and forward looking indicators look promising. This sharply contrasts with some other developed economies, most notably Canada and the EU, where the outlook appears far more gloomy. With next week’s CPI print and BoE meeting unlikely to derail this narrative, it is unsurprising to see sterling outperforming. Today, inflation expectations data is the only UK release of note, though we doubt this is likely to cause much upset for GBP price action. As such, a quiet end to the week looks in store for sterling traders, before a busy week coming up that should see a pickup in GBP volatility.


Whilst not amongst the worst performers on Thursday, a half a percent drop for USDCAD still leaves the pair trading closer to levels we think better reflect relative fundamentals. As we have observed previously, the loonie should underperform other G10 FX, in light of domestic conditions that look distinctly soft to us. As such, we still think the loonie’s performance yesterday was notable. Even as govvie yields climbed further than seen across many other major economies, notching 7bps on the 2Y and 11bps on the 10Y, CAD performance was still only average relative to other G10 currencies, and poor when placed in the context of the rates move. Today, housing starts and wholesale sales data are the most notable events out of Canada, though neither is likely to spark much life in USDCAD price action. Instead, the pair is likely to remain treading water into the weekend as focus turns to next week’s Canadian CPI data and a Fed meeting as the key risk events coming up for loonie traders.



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