News & Analysis

USD

Events throughout the past week pushed back against the narrative of inflation persistence and the risk that the Fed wouldn’t cut this year. The most crucial data point to this end was Friday’s payrolls release for April, which not only showed a dramatic deceleration in the pace of job growth but also saw the unemployment rate rise and wage pressures cool, all contrary to expectations. That said, while the release saw expectations of Fed easing this year rebuild and the dollar decline, we think it is too early for the dollar to structurally depreciate as Fed Chair Powell not only raised the bar for additional hikes at last week’s meeting but also highlighted the threshold for starting cuts was also high. One swallow doesn’t make a summer and neither does one soft labour market print make it feasible for the Fed to imminently cut, a realisation that soon set into markets and saw the dollar bounce from a near-one-month low intraday on Friday to trade just above the 105 handle – a level that it has held above at the start of this week.

While there is a litany of Fed speakers scheduled for this week, we doubt the narrative will diverge too dramatically from that presented by Fed Chair Powell last week. With no major data released out of the US until May 15th in the form of April’s CPI report too, the focus this week is likely to rotate away from the US and towards other major central banks. Here, decisions by the RBA (see AUD), Bank of England (see GBP) and Riksbank will dominate G10 price action ahead of Canadian jobs data on Friday, while key decisions from Banxico and Brazil’s BCB stand out within the EM calendar. While for most central banks domestic data warrants a more cautious stance, in the case of the Bank of England and the Riksbank, the backdrop is becoming more dovish. Whether policymakers will commit to a dovish pivot this week or not is another question, however, especially in Sweden where recent weakness in SEK argues against such a stance. In Latin America, this week’s decisions are also subject to high degrees of uncertainty. In Mexico, we think Banxico will hold the overnight rate at 11%, stressing recent upside risks to inflation, however, there is a non-negligible risk that they will cut. Meanwhile in Brazil, we suspect the BCB won’t be deterred by the latest slide in the real and will fulfil their forward guidance with a 50bps cut. That said, we expect their forward guidance to turn materially more hawkish, especially given the recent fiscal commitments.

AUD

The Reserve Bank of Australia’s overnight meeting largely met our expectations: the Cash Rate was left unchanged at 4.35%, the attending statement reiterated the Bank’s neutral guidance, and progress on inflation was acknowledged as being somewhat slower than expected with the trimmed-mean inflation forecasts raised by 30bps for this year. While the decision came as no shock to us, it somewhat underwhelmed markets where a residual risk of a further hike had been priced at just 8%. Though a hike was never likely, it highlighted how some traders were expecting a materially more hawkish RBA today following the stronger Q1 inflation release. With the RBA stopping short of reintroducing its hiking bias, today’s decision has led AUDUSD to shed half a percent in early trading.

EUR

The single currency benefitted from weaker US data and the spillover effects of BoJ intervention last week, leaving it to trade at levels not seen since early April before March’s hot US inflation report was released and geopolitical tensions in the Middle East exacerbated global inflation concerns. While recent developments warrant a mildly stronger euro, we think upside in EURUSD is capped from here, as evidenced by Friday’s failed attempt at breaking through 1.08. We, therefore, think EURUSD is likely to trade in a narrow range once again ahead of US CPI data on May 15th, which poses the potential to be the next big catalyst for a breakout.

GBP

Despite rallying against the dollar over the past week, sterling was the European laggard. Driving part of this underperformance was the view that this week’s Bank of England meeting would see policymakers embark on a dovish policy pivot after Deputy Governor Ramsden struck considerably dovish tones in April, noting that a tight monetary stance was reducing the more persistent components of inflation, leaving risks to the Bank’s inflation forecasts as tilted to the downside. However, Chief Economist Pill’s later and more hawkish speech undermined the message from Deputy Ramsden in our view. Pill directly addressed Ramsden’s earlier comments, noting that while he does think the persistent components of inflation are being squeezed, he doesn’t have any reason to believe this is happening any quicker than that believed six months ago. This provides an interesting setup for GBP traders this week. While we don’t think many will join Ramsden in his assessment of inflation conditions, risks are understandably tilted in a dovish manner. Should these risks not materialise, through both the voting split where no more than 2 members vote for a cut and a significant downgrade to the BoE’s inflation forecasts, we suspect sterling will play catch-up to last week’s moves, rising back up above 1.17 against the euro.

CAD

Like sterling, the Canadian dollar also struggled to make sizable inroads against the dollar last week. In our view, this was a result of the limited hawkish repricing in CAD rates this past month, meaning the softer US data and dovish repricing of US rates didn’t release as much pressure on the loonie as other currencies where a more hawkish Fed outlook was seen materially increasing the risk of a monetary-induced recession. Whether or not this dynamic of CAD underperformance on a more dovish BoC outlook persists this week depends on Friday’s labour market data. Under our base case of further slack emerging in the labour market, we expect CAD bulls will have little data to lean on.  With just a 38% probability that the BoC will follow up a cut in June with another in July, there remains plenty of scope for more dovish BoC bets to build on softer labour market data. And with little US data out this week too, we suspect a weak labour market reading will send USDCAD back above 1.37, leaving it close to our 1.38-1.40 range in Q2 that it could re-enter given the right mix of US and Canadian inflation data over the next two weeks.

 

Disclaimer
This information has been prepared by Monex Europe Holdings Limited, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.