News & Analysis


Weak this week? The loonie notched its third straight loss against the dollar on Monday, closing 0.4% lower on the day. That said, the currency was spared the carnage seen overseas, considering that the Scandies and the yen crumpled after traders continued to bet on a higher US terminal rate. Aside from higher rates, the main culprit for the Canadian dollar’s weakness today was a 0.6% decline in the S&P 500—at present, the loonie is the global currency most tightly linked to US equity performance, even more so than the US dollar itself. Last Thursday, stocks rallied even as volatility rose, a rare quirk that empirically predicts weak stock prices for about a week. Considering the link between stocks and the loonie, the odds tilt toward continued CAD weakness (USDCAD upside) over the near term. While data calendar and newswires were both fairly quiet, one interesting development was that the Bank of Canada released its brand spanking new Market Participants Survey. It found that about half of market participants expect a recession this year, not dissimilar from the results of the Q4 surveys of consumers and businesses, with a fairly mild median GDP forecast of -0.4%. Participants also expect two rate cuts in H2 this year, although they said the balance of risks tilts to the upside. Today, Tiff Macklem will be speaking in Quebec City at 12:45 EST (17:45 GMT), but considering that the topic is “how monetary policy works,” markets likely won’t pay attention.


If you felt like you were getting old and are starting to experience two-day hangovers, spare a thought for the US rates market which spent the whole of Monday picking up the pieces from Friday’s euphoric lunch. The sell-off in Treasury yields was driven primarily by a reassessment in the short-term interest rate market, which following Friday’s payrolls was reassessing the Fed’s likeliest terminal rate and the viability of rate cuts in the second half of the year. In total, a further 14 basis points was added to the Fed’s expected terminal rate, while only 35bps of cuts are now priced in between July and December, down from 45-50bps prior to the payrolls release. Compounding the market’s hawkish reassessment of the Fed’s path was commentary from Atlanta Fed President Raphael Bostic, who stated in a phone interview with Bloomberg that the blowout jobs report “would [likely] translate into [the Fed] raising interest rates more than I have projected right now”. While reiterating that his base case remains a terminal rate of 5.1%, in line with December’s forecasts, it remains a far stretch from where markets were pricing following Powell’s press conference on Wednesday. Today, the focus on Fed commentary remains front and centre with Chair Powell speaking in Washington at 17:00 GMT. Ahead of the main event, markets have slightly retraced yesterday’s price action, with equity futures tentatively trading in the green, a slight retracement in USTs, and a minor sell-off in the dollar.


After sustaining losses of 0.72% against the dollar yesterday, the single currency is now trading 2.8% below last week’s pre-ECB high. A combination of more hawkish Fed expectations and a dovish read on the ECB is largely at play here for the euro, and while short-term momentum in is lower for the single currency, the dynamic of widening yield spreads between the eurozone and the US may not have much further to run as a swathe of ECB speakers are scheduled for today. In advance, it is highly likely that influential ECB members such as Isabel Schnabel (17:00 GMT) and Francois Villeroy (10:00 GMT) push back on the market’s dovish read of last week’s ECB decision. However, this may not prompt a substantial retracement in the euro as the effects of their comments may be neutralised by a similarly hawkish Jerome Powell this evening too.


It wasn’t just US markets where bond market price action was rather dramatic following last week’s collection of central bank meetings. In the UK, Bank of England speakers are currently doing the rounds after the announcement last week that the BoE was raising the Bank Rate by 50bp. Comments by external MPC member Catherine Mann early yesterday morning helped Gilts sell off after she suggested that rates would, in her view, have to rise further than markets are currently expecting. The market reaction was somewhat surprising given Mann’s well documented hawkish stance on rates throughout this hiking cycle. Mann’s comments were followed by those of Chief Economist Huw Pill later in the day in a virtual Q&A that took a more dovish tone, helping to cool some market nerves. Notably, both speakers took the opportunity to highlight the impact of Brexit on the UK economy, in a stronger than normal intervention on a political hot potato, suggesting that the supply impact on the UK economy was a key driver of weak UK growth and high inflation. However, it wasn’t just intervention from the Bank of England that weighed on Gilt yields yesterday. A House of Lords committee also suggested that LDI strategies should be subjected to additional regulatory scrutiny. This comes following a near collapse of the UK pensions systems last September, sparked by LDI funds in the aftermath of a disastrous mini-budget. Despite the drama in Gilt markets, the impact on sterling was relatively muted, with GBPUSD down around 0.15% and GBPEUR up just under 0.5% on the day. Elsewhere in parliament, today looks like it might be a busy one, with rumours abounding that Prime Minister Rishi Sunak is about to embark on the first cabinet reshuffle of his premiership. The well-publicised removal of Nadhim Zahawi from his role as Chairman of the Conservative party has led to a gap at the cabinet table and it appears that Sunak will use the opportunity to breathe new life into his administration.

FX Elsewhere

The Aussie dollar is leading gains in the G10 this morning as the Reserve Bank of Australia not only hiked rates by 25bps to 3.35%, largely as expected by markets, but also guided towards further rate increases. A key facet of our bullish AUD call at the start of the year alongside China’s reopening was a hawkish reassessment of the RBA’s terminal rate. While this has taken place following the Q4 inflation report that was released towards the end of February, the RBA’s guidance that “further rate increases will be needed in the months ahead”, plural, has seen this dynamic extend overnight. The market implied peak in the RBA’s hiking cycle now sits just shy of 4%, up 30 basis points from where it was trading at the end of last week. Further AUD strength stemming from a more hawkish RBA could be visible towards the back-end of the week when the RBA releases its monetary policy report. The Bank’s assessment of the labour market will be key in determining how many further rate hikes are currently the implied base case.



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