News & Analysis


Volatility in USDCAD was the highest in three days, and yet it was still not particularly high. While the US dollar squeaked out a 0.1% gain against a basket of currencies, the loonie rose by 0.3% against its American counterpart. This improvement, while small, was the second-best performance within the G10, with only AUD doing better. In our view, the loonie’s gains were related to that of the Aussie, as market speculation that the Bank of Canada could hike later today picked up following the Reserve Bank of Australia’s surprise hike. Market odds for a BoC hike today are now 47%. We have written about our view extensively in recent weeks, and in fact, were one of the first shops to call for a June hike. The rationale can be boiled down to a simple equation: hawkish April meeting minutes + a conditional commitment to hike again if the economic outlook changed + much stronger-than-expected data = hike. The question now is whether Governor Macklem has the moxie to back up his words with action. A hike today would clearly be the most bullish outcome for the loonie, but with positioning having already shifted more bullish on CAD, the highest impact risk is that the BoC not only holds rates but uses dovish language. This is highly unlikely, and considering that markets are positioned for CAD strength, a dovish communications surprise would likely send the loonie tumbling against the dollar.


After yesterday’s action from the Reserve Bank of Australia, volatility across most major currency pairs evaporated, dragging implied volatility in the options space lower with it. The only notable price action in the expanded majors came in Latin America, where the stalling in front-end Treasury yields and low immediate event risk led markets to continue their hunt for yield. Outside of AUD and the Israeli Shekel, which strengthened over a percent from a multi-year low on rumours that the President is showing flexibility on his controversial judicial reforms bill,  the other four best performers in the expanded majors space came from Latin America. The Colombian peso was once again leading the LatAm charge as the improvement of the nation’s fundamentals overshadowed the deepening political crisis, while other high yielders (BRL, CLP, MXN) posted gains in the region of 0.5%.

This morning, the dollar continues to be in favour across the G10 space as FX markets broadly scan risk-off. This follows China’s trade data for May, which once again exposes the shortcomings of both global and domestic demand. Exports contracted -7.5% YoY, exceeding expectations of just a -1.8% decline, while imports fell 4.5% YoY, although this was slightly better than the -8% expected. Meanwhile, a dramatic 5% slide in the Turkish lira is likely doing little to help overall sentiment in the market. The catalyst of the decline still remains unknown, but the fact the lira is able to move in such a sharp manner is a sign of the shifting tides at play as investors prepare for what is likely a removal of capital controls and a sharp readjustment period for the exchange rate. Today, the dollar is likely to be determined by local stories outside of the US,  with most of the attention within the G10 space resting on USDCAD as the Bank of Canada is next up to bat. As we have been arguing over recent weeks, the case for the BoC to hike later today is compelling, but expectations continue to favour a hold on the basis that there is no press conference to effectively allow the BoC to ease markets into the resumption of its hiking cycle. Similar to the RBA yesterday, however, we think the chances of a hike are more likely than not. If our expectations are met, CAD strength on the back of a resumption in the BoC’s hiking cycle could drag other procyclical currencies higher where inflation persistence remains a key concern.


The euro was led lower yesterday by falling eurozone bond yields after consumer inflation expectations measured by the ECB for the 12-months ahead fell “significantly” from 5% to 4.1% in April. The data once again supports the view by most ECB policymakers that the hiking cycle is likely to be completed by the end of summer. Despite this, policymakers were quick to turn to the media to highlight that this doesn’t mean that an imminent pause in the hiking cycle is likely, with prominent Governing Council member Isabel Schnabel the latest take such a stance in the Belgian newspaper De Tijd. While the hawkish rhetoric is holding up near-term interest rate expectations, it is doing little support the market’s view of the longevity of these higher rates as over a full rate cut is now priced in during the first four months of 2024. While the decline in yields is likely to cap potential upside in EURUSD, we think the stability in near-term policy expectations is likely to keep the single currency well supported at current levels.


The pound dipped against the dollar again this morning as UK Prime Minister Rishi Sunak landed in Washington to meet US President Joe Biden. Whilst there had been some hopes for an agreement to be reached on trade, in particular focusing on technology and the green transition, reporting this morning suggests that these hopes have faded. Bad news for the UK economy was not just limited to trade deals this morning, however, with Halifax house price data also recording a year-on-year decline in house prices for around a decade. Whilst not quite as bad as the Nationwide measure seen last week which showed a 3.4% annual contraction, it reinforced the message once again of housing market weakness. This trend looks set to continue tomorrow with the publication of RICS data, with the report likely to show even more weakness in store, bad news for homeowners, but with a silver lining for the Bank of England. Policymakers will be somewhat relieved to see that rate hikes are weighing on the economy after signs of a potential housing market rebound in recent months. Whilst this is unlikely to shift monetary policy in the short term, falling house prices weighing on consumer demand is certainly something the BoE would like to see before calling an end to their hiking cycle.

FX Elsewhere

Yesterday saw the announcement of the latest monetary policy decision from the National Bank of Poland. Holding rates at 6.75%, in line with both our view and market consensus, the announcement contained little new information for markets. Indeed the statement that accompanied the decision was an almost exact carbon copy of the previous release. In this context perhaps the most notable takeaway from the release was the lack of change in the messaging, with some speculation pre-announcement that the NBP may soften their rhetoric. This might change later today however, with Governor Glapinski’s press conference due to be held at 14:00 BST. For the zloty, yesterday’s announcement was a little underwhelming, with EURPLN ending the session more or less back where it started. But price action this morning has seen the cross tick up suggesting that traders may be bracing themselves for at least the risk of a dovish surprise.




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