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CAD
The combination of both a US CPI report and a BoC meeting means that USDCAD traders are set to receive a double whammy of market moving events today. The former should add some modest support for the US dollar if it meets expectations. The latter, we think, is likely to weigh on the loonie. Whilst the Governing Council has given no indication that a rate cut is under consideration for today, a new set of inflation forecasts are likely to see a notable downgrade, suggesting that maybe it should be. We think close to half a percentage point could be taken out of the Bank’s Q1 forecast. Back in January, BoC staff had predicted price growth to be running at 3.2% YoY in Q1. Since then, inflation has printed at 2.9% YoY in January and 2.8% in February, undershooting both the BoC’s prediction and market expectations by some margin. Moreover, it also seems likely that an upgrade to estimated supply is likely to be forthcoming later today too based on recent BoC commentary. Not only would this suggest a further downgrade to forward looking inflation pressures, but also a wider output gap than previously envisaged, with this having already been estimated to lie in negative territory in the previous MPR. All told, these forecast downgrades should scan as dovish for markets that currently project just shy of three rate cuts from the BoC this year. They are also likely to create a communication problem for Governor Macklem in his press conference. Taken together, this would suggest that inflation is now back within the BoC’s tolerance band, and likely to stay there over the medium term. With the economy running below capacity and a labour market unwind that is showing signs of accelerating, this would strongly favour the BoC beginning to cut interest rates. That said, the one factor suggesting this will not happen today is the BoC’s recent hawkishness, which now stands in stark contrast to the data. We do, however, expect Macklem to open the door to cutting rates in June, and offer a notably more dovish take on recent developments than he did in March. If this plays out as expected, and is set against a hawkish US CPI release, USDCAD should be trading notably stronger later today, with a potential break above the pair’s recent ceiling of 1.3620.
USD
It was another confusing day for global macro yesterday, with markets showing inconsistent pricing across asset classes once again. Yields fell alongside equities, suggestive of a broad risk-off session, however this wasn’t reflected in FX markets, where the dollar treaded water alongside the euro and yen, while risk sensitive currencies like the South African rand and the New Zealand dollar made inroads. This morning, cross-asset pricing is a bit more textbook; equity futures are up, yield curves are moderately bear steepening, and procyclical currencies are all a touch higher against the dollar, symbolic of a market that is focusing on an improved global growth outlook. As we noted in our April forecasts and earlier in the week, if sustained, this market backdrop poses a risk to our bullish USD backdrop as it reduces the degree of US exceptionalism. This is especially the case if the NFIB small business optimism index is to be believed. The index yesterday showed the third consecutive decline in optimism, with the overall index dropping to the lowest level since December 2012. That said, we aren’t convinced growth conditions in DM economies are converging that much just yet, nor are we convinced that the US economy is finally feeling the impacts of Fed tightening. This should be reflected in today’s US inflation print for March, where both core and headline CPI are expected to print at 0.3% MoM. If expectations are met, the concern in markets that the Fed’s expected easing cycle is at risk of significant delay will be confirmed, an outcome once contrasted with more dovish outcomes by peer central banks should sustain upside in the dollar. However, with both markets and members of the FOMC fretting over this outcome, a downside miss today in the core measure will likely have an outsized impact. While we don’t think a downside miss could lead to enough dollar downside to send the likes of EURUSD north of 1.10, largely because traders have been burnt by false positives in US data multiple times this cycle and likely require confirmation of the weaker inflation backdrop before significantly shifting, it should be enough to take a significant chunk out of the dollar. We estimate that a 0.1pp miss in core CPI MoM could see the DXY index fall close to a percent on the day.
NZD
The Kiwi dollar compounded yesterday’s rally overnight as the RBNZ sounded a more confident tone in its April rate statement. Although the accompanying documentation didn’t see the central bank retain its explicit hiking bias through stressing the Bank “has limited tolerance to increase the time to the target mid-point”, the economic assessment also didn’t read that dovish, as some had predicted after Governor Orr noted that the Bank was increasingly confident that monetary policy was dampening inflation. Instead, the Bank noted economic output was “weak” and omitted prior concerns about upside risks to inflation, but continued to note the need to maintain the OCR at “a restrictive level for a sustained period”. In light of the RBNZ’s more cautious view towards cutting, we are turning more bullish on NZDAUD, but note risks to this call remain pronounced from a more conservative Fed stance given NZD’s greater sensitivity to US rates.
EUR
Yesterday was another quiet day in terms of eurozone economic data. The only release of note was the ECB bank lending survey, which showed the drag on growth from tighter financial and lending conditions likely peaked in late 2023, although weak loan demand should give the ECB comfort that marginally easing monetary conditions won’t spur a significant reacceleration in the economy. What was more notable from a market perspective was the complete reversal in European equities, which more than reversed Monday’s rally. Benchmark indexes are up once again this morning with gains broadly spread across jurisdictions and sectors, but are yet to return to Monday’s highs. The increased volatility in European stocks highlights to us the uncertainty over the eurozone growth outlook and the uncertainty over the ECB’s ability to effectively calibrate policy. This compounds our caution over turning constructive on EURUSD and European assets, a view that should be further supported by US inflation data this afternoon and a more dovish sounding ECB on Thursday. That said, risks to EURUSD today are tilted to the upside on a downside surprise in US inflation. Should core CPI drop to 0.2% MoM, EURUSD could rally close to a percent, leaving it to trade just shy of the 1.10 handle that was last breached in early January.
GBP
Like much of the G10 FX complex, the pound was largely left treading water yesterday. That said, the limited set of market moving events did give traders the opportunity to push sterling higher against the euro, with the two tenths increase for the cross better reflective of the UK’s relatively stronger fundamentals in our view. However, with a blank data calendar once again today and no BoE speakers of note scheduled, sterling traders’ attention is set to be squarely focused on developments elsewhere. Chief amongst these is likely to be a US CPI report for March. If, as we expect, this shows price growth that remains elevated, further tempering of Fed easing bets should see GBPUSD weakening at the margin. GBPEUR, meanwhile, looks set to remain rangebound once again. Traders will likely have to wait for tomorrow’s ECB meeting to see an outbreak of price action on this cross.