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CAD
A late rally in oil prices up to the $80 mark resulted in a sharp retracement in the CAD losses yesterday, leaving USDCAD flat on the day. This morning, price action in Europe once again suggests there is a bearish CAD bias at current levels, but after repeated U-turns after the North American open, we are hesitant to look too much into this morning’s price action as a signal for the day. Today, after a light few days on the Canadian data front, the Bank of Canada’s meeting minutes are released. While the meeting minutes weren’t seen as a major market moving event when they commenced at the start of the year, we believe they have increased in significance after April’s more hawkish edition led us to correctly predict the resumption in the BoC’s hiking cycle in June. With the BoC providing very little guidance as to its next steps, the release of July’s minutes are likely to prove influential once again. However, we expect them to highlight a greater hesitancy to hiking rates further than the uprating in the official inflation projections suggest.
USD
Yesterday’s session was nothing to write home about in a broader sense, with only a few interesting local developments taking place locally for some currencies (see EUR and FX Elsewhere). For the US, the main story was the improvement in the Conference Board measure of consumer confidence, which rose well above the 80 level that usually signifies a recession in the next 12 months with a reading of 117.0. Underpinning the improvement has been a rebound in the housing market, with data yesterday confirming this with a 0.99% MoM increase in the Case Shiller house price index, and tight labour market conditions. On the latter, the Board’s measure of “jobs hard to get” fell to 9.7, its lowest since March 2022 and before that July 2000. The improvement in consumer confidence follows a string of robust US growth data and suggests that persistence in services inflation is likely to result in a slower pace of disinflation from the current 3% level of CPI. We expect growth resiliency and limited slack in the labour market to be the focal points of Chair Powell’s commentary at tonight’s Fed meeting as it supports the central bank’s mildly hawkish disposition, which is needed to prevent another substantial loosening in US financial conditions like that following the release of June’s CPI report earlier in the month. While we think the Fed will likely embark on its last hike of the cycle this evening, raising rates 25bps to bring the Fed funds target range to a terminal level of 5.25-5.5%, we expect Powell and officials thereafter to stress that the risks remain to the upside for rates, a view that is consistent with the June dot plot of one further hike this year. This should prevent another sell-off in US rates and keep the dollar supported above the 100 level on the DXY index.
EUR
The euro trailed the rest of the G10 currency board yesterday as the ECB’s Q2 Bank Lending Survey data showed that the central bank’s monetary tightening continues to be forcefully transmitted to the real economy and data out of Germany showed a continued deterioration in business expectations . Overall, credit conditions for businesses and housing purchases tightened further albeit at a slower rate than in Q1, while the tightening in consumer credit accelerated in the second quarter. Most strikingly was the drop-off in businesses’ loan demand, which declined to a record low as firms opted to pull back on longer-term investment projects amid weak growth expectations and financed short-term spending with retained profits. Coinciding with a weak batch of PMIs on Monday, yesterday’s BLS data highlighted the real risk of the ECB overtightening monetary policy, sending the eurozone into a more pronounced or elongated recession. This is undoubtedly a major risk for ECB policymakers to weigh up, and one we expect to dominate the debate heading into September’s decision. If confirmed by weak advanced Q2 growth data and softening national inflation releases on Friday, we expect markets to continue pricing a weaker euro and continue to see the possibility of sub 1.10 as likely.
GBP
After a busy few weeks for UK assets after a deluge of data releases, yesterday’s session provided another welcome break for traders. The pound sat near the top of the G10 currency board against the dollar, although its gains were slight at just 0.3%, while the FTSE 100 continued its recent trend higher on the improved economic outlook. Today, we expect GBPUSD price action to remain dictated by how the broad dollar trades given no domestic economic data is scheduled for release and the UK financial news cycle remains fixated on Nigel Farage’s banking scandal.
FX Elsewhere
It wasn’t just the eurozone where more dovish expectations of monetary policy resulted in currency weakness. In Brazil, outright deflation in the first two weeks of July emboldened expectations that the BCB will ease its policy rate by 50bps in its first cut next week, which resulted in USDBRL rising 0.5% on the day. Meanwhile, further effective easing in Hungary led to a continued rally in EURHUF, although the move was less pronounced than in Brazil due to the 100bp cut in the emergency one-day rate being widely expected. Finally, Australian inflation data for Q2, released overnight, led markets to price out the possibility of a rate hike from the RBA next week, resulting in the Aussie dollar underperforming the G10 basket in early European trading this morning. The data, which showed headline inflation falling 100bps to print 0.2pp below expectations at 6% but still strong underlying services inflation, confirms our view that one additional rate hike from the RBA is unlikely ahead of Q2’s wage price index data is released on August 15th. Markets are now pricing just a 15% probability of a hike at next week’s meeting and a 40% probability for September.