News & Analysis


After a few high octane sessions, yesterday provided traders with some respite. The dollar generally continued its post-Fed slide, while early movers JPY and CHF held onto their gains. In fact, the yen even extended its rally into the close, however, unlike price action throughout the week, moves were fairly orderly, helping to bring levels of FX volatility lower. Data out of the US didn’t disrupt the relative calm in markets either. While unit labor costs for Q1 printed above expectations of 4.0% with a reading of 4.7% QoQ annualised, downwards revisions to Q4 meant on a year-on-year basis the measure eased to 1.8%. The opposite was true in the provisional Q1 nonfarm productivity reading, which printed below expectations at 0.3% but showed a pick-up in year-on-year terms to 2.9%. Overall, the data suggests that wage growth is cooling but still elevated, a feature we expect to be compounded in today’s nonfarm payrolls data which is undoubtedly the main scheduled event for markets this week.

Expectations are for the US economy to add 250k jobs in April, marking a slowdown from the average 270k pace of job gains seen in Q1. We think this remains too low given hiring momentum, positive seasonal factors, and few pieces of anecdotal evidence to suggest that employment conditions have cooled. In conjunction with wage data, which as mentioned should remain elevated based on recent indicators, a strong payrolls print should limit the extent to which markets turn dovish on the Fed. However, we doubt that a marginal beat in expectations will be sufficient to take the dollar back to recent highs now Chair Powell has effectively squashed the right tail risk for US rates by essentially ruling out further rate hikes at this time. This naturally leaves the dollar with an asymmetric risk profile. Any signs of weakness within the data, whether it be through a rising unemployment rate or a weaker payrolls growth, will only fuel a reflation in dovish Fed bets, which would weigh heavily on the dollar. In fact, our latest analysis shows that a further 2 rate cuts priced into swap markets this year would account for a 3.5% decline in the DXY index. While we doubt the data will show signs of weakness, the potential impacts make today’s release of high importance for traders.


As we noted yesterday, Swiss inflation came in above expectations, especially on the core measure, putting the SNB’s Q2 rate cut at risk. However, on further inspection, most of the inflation pressures came through imports and non-domestic factors like airfares and package holidays. Conversely, domestic price pressures remained moderate in April, printing at just 0.08% MoM. This has led the 3-month annualised rate to soften considerably from 4% at the start of the year to just 1.8% last month. Together with the fact that the ECB is set to cut rates next month, we don’t think the data poses a substantial risk to the SNB’s next meeting, where a rate cut is still effectively priced in by markets. That said, Swiss policymakers will be careful not to deliver it in too dovish of a manner given the inflation risk further CHF depreciation poses through the import channel. On net, this supports our view that CHF weakness will be moderate over the course of Q2, leaving us on track with our 0.98 EURCHF forecast.


The single currency benefitted from a weaker dollar and moderately more hawkish commentary from ECB policymakers. While Chief Economist Philip Lane continued to stress data-dependency, stating that policymakers “are not pre-committing to a particular path”, Greece’s Governing Council member Yannis Stournaras, who has previously provided guidance that he expects four rate cuts this year, toned down his view to say three cuts are more likely. All told, it seems as if the ECB hawks are winning the battle, with a pause in July now more likely following cuts in June. This has helped underpin EURUSD above 1.07, with the 2-year swap rate narrowing to just -147bps. That said, for the euro to extend its rally back towards the 1.08 handle, we would need to see hawkish ECB repricing coincide with more dovish Fed expectations. At present, this looks unlikely, but any slip in today’s US jobs data or another weak PMI services reading thereafter could be enough to trigger this. While not our base case, risks are tilted towards a stronger euro heading into the weekend.


Sterling price action was uneventful yesterday, with the pound moderately drifting higher even as UK yields underperformed. Nevertheless, the narrowing in UK-eurozone rate differentials didn’t deter GBPEUR from drifting higher, although the moves in context were ultimately small. Looking ahead today, little in the UK calendar means sterling remains at the mercy of US developments, while positioning ahead of next week’s BoE meeting could also play a role once the effects of the US payrolls print are felt. Here, we suspect the BoE voting split will turn moderately more dovish, but ultimately policymakers will stop short of endorsing a June cut this far out.


With oil trading higher, US yields continuing to fall, and equities finally managing to close higher on the more accommodative rates backdrop, the loonie managed to extend its gains yesterday, rising 0.48% on the day. The surge in the Canadian dollar wasn’t impaired by BoC Governor Macklem, who in his second parliamentary testimony repeated the message that the Bank are finding greater confidence to cut rates in the latest data but stopping short of providing more explicit guidance. Today, all eyes are on the US payrolls figure. With US rates tumbling after Wednesday’s Fed meeting and that having little spillover to Canadian yields given BoC easing expectations were the least impacted by the hawkish Fed repricing in the G10 last month, the loonie finds itself rich by our metrics. A strong US payrolls print should prompt a slight retracement in USDCAD, taking it back above 1.37. However, as mentioned in the EUR section, today’s payrolls report poses a substantial risk of inflating Fed easing bets and dampening the dollar.



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.