News & analysis

Broad US dollar weakness has been the theme of this week’s trading thus far. Today, the kiwi dollar leads gains in the G10 space as the New Zealand government dramatically eases lockdown restrictions and RBNZ Governor Adrian Orr signaled that negative interest rates are still some way off. With restrictions easing globally, risk sentiment continues to be supported in the market.

Even sterling sits higher against the dollar despite dismal labour market data released yesterday and the lowest inflation data in 4-years released this morning. Bank of England Governor Andrew Bailey didn’t derail the pound’s rally either, with the central bank continuing to keep the door open for negative rates. The Canadian dollar, similar to the pound earlier, also brushed off dismal CPI data this afternoon.

Negative inflation readings are of little concern to central banks at present as they try to prop up activity and avoid extensive structural economic damage.

The Department of Energy US Inventory release was more of a driver for the loonie today as further inventory draws in the US helped oil trade higher.


  • Governor Orr defied expectations for an immediate rate cut into negative territory. Speaking on Bloomberg TV, Orr said “we don’t want to go negative at this point; we’re prepared to if we have to but not until a lot later”. Orr said “it’s got to jump the hurdles. It’s got to be seen to be necessary”. While Orr’s comments helped the kiwi dollar to lead gains in the G10 space on reduced expectations of rate cuts, they weren’t anything the market didn’t already know. After the RBNZ policy review on May 13th, the central bank’s own forecasts showed a little chance of another rate cut through 2020.
  • Sterling started this morning on the back foot as April’s inflation data showed a 0.8% YoY increase, the lowest reading in four years, and downside pressure increased from stalling Brexit negotiations. However, broad US dollar weakness helped sterling joining the general G10 rally. The pound’s rally remains mild in comparison to its G10 counterparts,however. Comments from BoE Governor Bailey didn’t upset the party though, as his testimony to the Treasury select committee didn’t add much more information to that already given. Bailey stated that the central bank is neither ruling out, or in, negative rates. In conjunction with a breakdown in relations in Brexit talks, the prospect of negative rates will keep a lid on any sterling strength in the coming sessions.
  • The loonie shrugged off a -0.2% CPI reading this afternoon, focusing more on the broad G10 rally and positive DoE inventory headlines. Inflation was dragged down by the collapse in oil markets, with gasoline prices falling nearly 40% YoY in April, and the implementation of lockdown measures hampering social consumption. Where consumption was channelled, i.e. essential items such as groceries and cleaning products, the Bank of Canada can observe rising inflationary pressures. April’s inflation release was so marred by Covid-19 and lockdown measures that the BoC is likely to disregard any information contained in it. The market took this stance too, as expectations for further policy moves remain in a standstill.
  • Improving oil prices have also been supportive of a weaker dollar over the last week. The oil market turned a highly observed theme again, after the June contracts, due on May 19th, largely averted the negative pricing they saw in the April final settlement. In turn, WTI June futures closed over the $30pb mark and traded at a premium to July before their expiry. This pricing suggests eased concerns about the short-term piling capacities that drove prices to negative territory just about a month ago. Fresh weekly data released by the US Energy Information Administration portraits the current situation in oil markets. U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.0 million barrels from the previous week. At 526.5 million barrels, U.S. crude oil inventories are about 10% above the five-year average for this time of year. Total products supplied over the last four-week period averaged 16.1 million barrels a day, down by 19.0% from the same period last year.


CPI inflation in major economies plummet on the face of lockdown measures
Negative oil pricing is a story in the past, as the oil glut and inventory levels ease.


Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst



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