News & Analysis


The loonie strengthened alongside a broader risk-on move in the currency market, although risk signals were decidedly mixed across asset classes. The day was quiet with no news or data, so there’s no point in reading too deeply into the reasons behind yesterday’s price action, but the TSX’s 0.9% gain, one of the strongest across global equities, definitely didn’t hurt the bullish CAD case. The loonie briefly made a fresh high against the dollar, but only by a few pips. It’s still trading near the same levels as last week. Today, with the dollar taking another leg lower overnight, the break lower in USDCAD has been more pronounced, especially given there is a key risk event on the horizon for CAD traders in May’s inflation report, set to be released at 08:30 ET/ 13:30 BST. The consensus expects headline CPI to fall from 4.4% to 3.4% year-on-year, which at first glance seems like it would be a big win in the fight against inflation. Newspapers will undoubtedly frame the number as a sign that inflation is cooling. But the headline metric falling, even sharply, does not tell you anything whatsoever about near-term inflation pressures, which is what the Bank of Canada will care about. Prices likely rose in May, and faster than the pace consistent with 2% inflation. But because in May of last year, prices went up by 70% of the BoC’s 2% annual target in a single month, this May’s price increases will pale in comparison. That doesn’t mean inflation is back on track. It just means that last May’s price hikes were absurdly large. For inflation to actually seem like it’s back on track, you’d want a monthly price increase of 0.2% or below, as well as broad signs of cooling among a large number of prices, especially for goods and services that are tied to discretionary spending or are sensitive to interest rates. If that happens, the Bank of Canada will take note, and we could see the loonie reverse a chunk of the gains it accrued over the past month. But we’d be surprised to see that occur this early after the BoC’s resumption of its hiking cycle, and consensus agrees with a 0.4% monthly gain expected.


The big stories from yesterday’s session came from the overnight session, where officials in both Japan and China stepped up support for their ailing currencies. In China, with yet another weekend passing without any stimulus measures announced, investors voiced their concerns over the nation’s growth profile by selling the yuan, sending the onshore rate 0.86% lower. Meanwhile, with the Japanese yen weakening to its lowest level since November 2022 even as markets turned risk-off last week, government officials began the week with further verbal jawboning. This time around it was Cabinet secretary Matsuno who said that authorities will deal “appropriately” with any one-sided, sudden moves in FX markets, a tip of the hat towards further stealth intervention if JPY weakness persists. This morning, the overnight session provided some excitement yet again as the People’s Bank of China set the onshore fixing rate 111 pips stronger than expectations, the largest spread since November and up from yesterday’s 77 pip premium. The fixing spread is typically used as a signalling mechanism of the PBoC’s intent to markets, and the strength of today’s fixing suggests that the central bank is becoming less tolerant of CNY weakness. In early European hours, traders have acknowledged the central bank’s intent, taking the yuan 0.4% higher. This, alongside comments from China’s Premier Li Qiang that China is on course to achieve its 5% target for economic growth, has led the dollar lower this morning, with AUD and NOK leading gains against the greenback in the G10 space after a torrid past week. The softer dollar is likely to persist into the ECB’s Sintra symposium, which kickstarts after ECB President Christine Lagarde gives the welcoming remarks at 09:00 BST. While the main market events at Sintra take place tomorrow, given the light US data calendar today, some focus will be paid to the more academic panels. Specifically, this morning’s 11:00 BST panel hosted by ECB Board member Isabel Schnabel on structural changes in energy markets and the implications for inflation will be in scope for some market participants, especially as Norges Bank President Bache is set to participate.


The single currency spent most of yesterday’s session recovering some of the ground lost late last week following a weak set of flash PMI data. This morning, the euro’s upwards momentum has continued as the currency climbs 0.3% on the back of broad USD weakness overnight. The slight recovery in the euro ahead of the flurry of ECB commentary out of Sintra in the next 48 hours is notable as it coincides with a stabilisation in money market expectations for the ECB’s policy path, where a 50% probability of a 25bp hike in September to 4% is priced. As such, markets are arguably positioned for a continuation in the central bank’s hawkish rhetoric this week, which is likely in our opinion given the doves currently have no reason to push back on more hawkish pricing this far out from the pivotal September meeting. Today, the main event for euro traders will be President Lagarde’s opening remarks at 09:00 BST, but given the proximity to the last ECB meeting, we don’t expect her tone to have changed from the past press conference. The bigger risk to monitor is of course unofficial comments from ECB policymakers, which have been plentiful at Sintra in previous years. While we don’t believe it is the right time for the doves to strike back, whether they chose to or not will be a key consideration to monitor in today’s session.


Some signs of relief at last seem to be emerging on the inflation front, with the BRC shop price index falling from the 9.0% YoY increase recorded in May to 8.4% for June. Whilst still well above the long run average, this marks the first significant fall in the reading since the start of the current bout of rapid price growth. Evidence that inflationary pressures are beginning to ease will be greeted with enthusiasm on Threadneedle Street, where just last week the Bank of England was forced to reaccelerate the pace of monetary tightening, given increasing signs of wage-price spiral emerging in the UK economy. The same is likely to be true in Sintra, where the BoEs Tenreyro is due to speak today, before appearances from Chief Economist Pill and Governor Bailey tomorrow. Given the lack of guidance accompanying the recent policy decision, BoE watchers will be listening intently to these talks for any hint on the outlook for UK monetary policy. More rate rises certainly appear to be on the horizon, but with swap markets currently pricing a likely terminal rate of 6.25%, we are sceptical that the BoE will ultimately be able to reach this level without triggering a nasty recession. But for now at least, FX traders look content to wait and see with the pound rising marginally to start the day, up a quarter of a percent against the dollar whilst trading flat against the euro on the morning’s news.



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