News & Analysis


USDCAD starts the day once again trading towards the top of recent ranges, but still unable to build sufficient momentum to sustain an upside breakout. While arguably Governor Waller’s comments overnight should have provided ammunition to price in further divergence between the path for rates in the US and Canada, markets have so far been content to see expectations for the BoC broadly keep pace with those for the Fed. This is unlikely to change today either, barring a major surprise. Canadian GDP figures published at 12:30 GMT are expected to show a pickup in activity in January, with the economy growing by a respectable 0.4% MoM. As we have noted previously, this is likely to be misleading, with headline figures distorted by the impact of rapid population growth propping up activity. More to the point, this would suggest a further fall in annual GDP figures, with a print of just 0.8% YoY expected, well below potential growth for the Canadian economy. This building economic slack should be weighing in favour of rate cuts at the BoC, though given recent commentary from BoC officials, we doubt this will come in April. In spite of all this, an on expectations print is unlikely to challenge the BoC’s high for longer stance sufficiently to move market expectations, which should see USDCAD once again stuck around current levels this afternoon. That said, risks are asymmetric. While there is little scope to further price out rate cuts, a surprise to the downside later today could see traders reconsider their easing bets, finally triggering the expectations divergence needed to see USDCAD take another leg higher.


Governor Waller sounded notably more hawkish than Chair Powell when speaking at the Economic Club of New York yesterday. In a speech entitled, “There’s Still No Rush”, Governor Waller labelled the recent inflation figures “disappointing” and said “it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data”. His comments helped lift Treasury yields and the dollar, but didn’t necessarily cause the ruptures in markets that we had anticipated and markets had partially positioned for yesterday morning. This is because Waller also said he wants to see “at least a couple of months of better inflation data” before cutting. With three more CPI reports due until the June 12th meeting, where the odds of a rate cut are still north of 50%, Waller’s comments didn’t delay the current market-implied easing path for the Fed this year. Nor did they alter the overall profile of rate cuts for this year, with swaps still aligning with the Fed’s median dot for three this year. Most of the impact was instead on forward swap rates, where around 6bps of cuts were priced out for next year. This drove most of the adjustment in 2-year yields, which sit 5bps higher this morning.

As a result of Waller’s comments, markets have opened this morning with a mild dollar bid. The Kiwi dollar sustained the largest losses overnight, falling half a percent, due in part to its highest sensitivity in G10 FX to US rates, but assisted also by comments from RBNZ Governor Orr which guided markets towards future rate cuts. That said, the fallout in markets could have been much worse should Waller’s comments have led to a greater rally in Treasury yields and a breakout in USDJPY and USDCNY to the upside. This risk was what markets were positioning for in yesterday’s session, and arguably led Japanese policymakers to take out an insurance policy in the form of verbal intervention. Given this scenario would have led to significant depreciation in other Asian currencies against the dollar, it is unsurprising to see the likes of KRW buck the broader trend in markets and post moderate gains.

In terms of today, it is once again another quiet session for markets, with quarter-end flows and positioning ahead of a long weekend in Europe likely to dominate. Markets will receive the third reading of Q4 GDP at 12:30 GMT, but in the absence of any large revisions, this is unlikely to rock the boat. The last major source of volatility for markets this week will be February’s PCE report, due tomorrow at 12:30 GMT, and Chair Powell’s chat with radio host Kai Ryssdal at 15:30 GMT. Here, focus will be on how strong the personal spending figures land and Chair Powell’s confidence on the progress of disinflation matches up to Waller’s.


The single currency continues to drift lower this morning, breaking back below the 1.08 handle as rate differentials have widened to their largest this year following softer core inflation data out of Spain and hawkish commentary from Fed Governor Waller. As we have pointed out since the ECB’s decision in early March, we think the ECB will need to dramatically outpace the Fed in terms of easing this year given the region’s significantly weaker cyclicals. Markets are finally paying attention to this, and if confirmed by subsequent national inflation prints over the next five business days, we suspect EURUSD will float lower towards our month-end target of 1.07.

Outside of EURUSD, European traders also paid keen attention to EURSEK and EURCHF. The former initially rallied on a more dovish Riksbank decision, with the central bank officially assigning roughly 50% odds of a rate cut in May. However, as we point out, the details of the decision were significantly less dovish. Notably, the Riksbank implied that krona weakness would facilitate a pause in May. With the ECB not set to cut until June, early action by the Riksbank would undoubtedly cause the krona to depreciate, effectively making such actions self-defeating. This alone makes June a more probable time for a cut, a realisation soon shared in markets that led EURSEK to trim its gains. In EURCHF, the implications of a weaker currency on its central bank were also in focus as markets proved reluctant to take the cross north of 0.98 due to the feedthrough that would have on Swiss inflation and thus the prospect of an SNB cut in Q2. We think this risk will lead to a slowdown in the pace of CHF depreciation, leaving EURCHF to close out the month at our forecasted rate of 0.97 before drifting slightly higher to 0.98 in Q2.


A relatively quiet run into the Easter break was left largely undisturbed by final UK GDP readings published this morning. These confirmed that the UK fell into a technical recession at the end of 2023, though with only minimal changes from preliminary estimates released in February, this is ultimately of little consequence for traders. Indeed, with an uptick in PMI readings alongside a robust January GDP number in the bag, soft economic performance from the end of last year already looks like very old news for markets. All told, the lack of new information once again leaves the pound directionless heading into the end of the week. Meaningful price action over the next few days will likely rest on events elsewhere, with Fed Chair Powell’s speech tomorrow a main focus for GBPUSD traders after Governor Waller’s comments yesterday.


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