With local markets shut for a civic holiday, there was limited excitement in USDCAD on Monday. Indeed, the pair was range bound through the day, finishing up virtually unchanged. This morning however is a different story, with the loonie falling three tenths against the dollar to start the session. This comes as traders continue to parse last week’s jobs data from both sides of the US-Canada border this morning, and wait in anticipation of trade data out this afternoon, as markets gear up for the week’s big risk event coming in the form of US CPI data out on Thursday.
Whilst this week’s big event in the form of US CPI is still some way off, dollar activity continues to wash through currency markets. A three tenths runup in the DXY index through to midday yesterday reversed in the afternoon part of the session and arguably formed the main source of excitement in G10 FX yesterday. Whilst the initial climb in the greenback was largely attributed to hawkish comments from Bowman over the weekend, suggesting multiple further hikes may be forthcoming from the Fed, markets seem once again disinclined to engage sustainably with the idea of further monetary tightening this year, despite yet more hawkish Fed commentary. On this note, the Manheim US Used Vehicle Value Index fell 1.6% on a seasonally adjusted basis, pointing once again to the disinflationary pressures that are continuing to flow through into US prices. But the moment of truth will come once again on Thursday, where barring an upside surprise, the reading is likely to confirm market suspicions that further policy tightening is likely unnecessary in 2023.
This morning however, Chinese trade data is the big news, with exports falling by 14.5% on a YoY basis, below expectations and down from a 12.4% fall last month. But it was imports that really caught the eye, falling by 12.4% YoY, a marked decline from the 6.8% seen in June. Clearly bad news for currencies exposed to Chinese growth dynamics, this has seen both the aussie and kiwi down seven tenths against the dollar, whilst contributing to the US outperformance narrative once again and seeing the DXY index up two tenths to start the day. Elsewhere, it was also interesting that labour cash earning in Japan printed at 2.3% below expectations of 3.0%, helping pull the yen around four tenths lower against the dollar. This comes on the back of the BoJ easing their yield curve control, despite having warned that the nascent inflationary process may not be sustainably embedded in the Japanese economy. Given this morning’s reading, fears will grow that they may have had a point, although more prints will be necessary to really convince many of this.
Yesterday’s session proved a relatively quiet one for the euro, with the single currency largely retracing early losses to finish down one tenth against the dollar. The modest price action is perhaps unsurprising, given the time of year and paucity of data. Despite this, it was notable that German industrial production data showed a sharper than expected contraction in activity, weighing in eurozone growth sentiment once again. However, with the pair rebounding through the New York crossover and following commentary from Fed speakers, the day ultimately proved a wash for EURUSD. Today, final CPI readings and trade data look unlikely to significantly move the needle for the single currency, especially with the summer season in full swing from Europe, meaning any excitement for EURUSD is likely to be mostly a function of developments elsewhere once again today.
The pound posted some modest gains over the course of yesterday’s trading, even following REC jobs data and an updated Halifax house price reading that both made for less than positive reading for UK watchers. In the first instance, the balance of permanent placements fell a full four points to read -7.6, suggesting growing weakness in the UK labour market. In the second, data from Halifax suggested that UK house prices fell by 0.3% in July. Importantly for FX markets though the UK was a notable outlier in bond markets, with Gilt yield ticking up modestly across the curve, even as they posted falls elsewhere as traders continue to digest the details of last week’s Bank Rate decision. On that note, comments by BoE chief economist Huw Pill yesterday evening proved modestly dovish once again. Whilst he did recognise that certain parts of the inflation basket, in particular food inflation, would only cool slowly, Pill also framed risks to the inflation outlook as increasingly two sided, adding fuel to the speculative fire that Bank Rate is close to its likely peak. In our view, another 25bp hike in September will be the last of this cycle, before cooling data allows the MPC to pause at the November meeting. In this vein, slowing BRC like for like sales data out this morning should give policymakers some confidence that rate rises are weighing against consumer demand. Granted, the fall in the reading, from 4.2% to 1.8%, was helped by some bad weather. Nonetheless, this has still seen the pound lower to start the day’s session, down just over a tenth against both the euro and the dollar.