News & Analysis


Though arguably the main North American event this week is likely to be Wednesday’s Fed meeting, there is still plenty going on north of the border in Canada. At the centre of attention should be tomorrow’s CPI release, which markets expect to show a modest uptick in headline inflation, with YoY CPI rising from 2.9% in January to 3.1% in this latest print. We would, however, note that even this would fail to reverse last month’s 0.4pp downside surprise. More to the point, measures of core inflation are expected to ease modestly, keeping Canadian disinflation on track. Most significantly though, we expect to once more see very little price growth outside of housing components, a point that should again highlight that inflation has evaporated in the real economy. As such, while markets may initially see the headline print as supportive of the BoC keeping rates on hold for the time being, the soft details of this week’s report, once digested by markets, should ultimately see the loonie underperforming.

The extent to which the loonie depreciates will ultimately be determined by context of the BoC’s summary of deliberations, due to be released on Wednesday. Should Governing Council members show a greater openness to cutting rates in April relative to Governor Macklem earlier in the month, any downside surprise in the core inflation measures should have an outsized impact on CAD seeing as markets are assigning only a negligible risk that the BoC cuts next month. Such a scenario would notably open up the spread in expectations between the anticipated BoC and Fed policy paths, risking a sharp upside move for USDCAD in advance of Wednesday’s Fed announcement.


Last week was all about tail risks for markets. A series of hot consumer and producer inflation prints put the spotlight firmly back on the risk of more inflation persistence, and thus the probability that US rates stay higher for longer despite signs that the economy is slowing. While this supported a decent dollar bid as Treasury yields converged back to their year-to-date highs, the rally in the dollar DXY index saw it reverse only half of its month-to-date decline. Thus, with most major currency pairs continuing to trade within recent ranges, markets began to focus on what could potentially cause a breakout. This naturally meant the options space came back into focus. As we noted last week, one-month volatility has cratered across a number of the majors, reaching lows seen only a few times in the past decade as the risk of central banks moving in their first meeting of Q2 is now seen as minimal. However, that isn’t to say options traders are predicting completely benign conditions. One-week implied volatility across a number of currency pairs has spiked, leaving curves deeply inverted as traders looked to hedge the serious event risk that lay ahead this week.

Most of the focus naturally rests on the central bank calendar this week, with six decisions due out of the G10 and a few decisive meetings in the EM space too – Banxico where the jury is out over whether to cut or hold, the BCB where they could guide markets to a slower pace of future easing, and the CBRT where there is brewing speculation over further rate hikes. Within the G10, all of the attention naturally lies with the Bank of Japan on Tuesday and the Swiss National Bank on Thursday, seeing as both are contenders for an actual shift in rates (hike in Japan vs cut in Switzerland), meanwhile the Fed on Wednesday evening will also garner a lot of attention as policymakers update their forward guidance through a fresh set of economic projections. However, markets won’t have to compete with just central bank decisions this week. On Tuesday, key inflation data is due out of Canada, while Thursday sees the release of flash PMIs from the eurozone, UK and US for March. Both data series could bring the prospect of rate cuts from the BoC and ECB in early Q2 back into focus, provided they show significant economic weakness filtering through into inflation conditions, and thus present yet another avenue for rate divergence.

While there is every possibility that major currency pairs end this week well within recent ranges, the sheer amount of economic releases suggests that won’t occur without a significant amount of intraday volatility. Today is likely to be the exception to that rule, however, as the data calendar doesn’t come online for markets until tomorrow morning. As such, positioning is likely to be the dominant driver today.


The single currency dipped back below the 1.09 handle on Thursday for the first time since Chair Powell’s Congressional testimony earlier in the month, with the move driven by an uptick in US yields and a weaker equity backdrop as markets focused on the risk that inflation remains more persistent in the US even as the economy slows. Whether EURUSD’s downward correction has room to run further depends this week on the Fed’s updated guidance on Wednesday evening and Thursday’s flash PMI readings from either side of the Atlantic. A more cautious tone on rate cuts from the Fed, delivered either through a shift higher in their median dot projections or an upshift in the skew of policymakers projections, and PMI data showing the eurozone economy remains stagnant despite the recent improvement in forward looking indicators could see EURUSD fall below the 1.08 handle for the first time since mid-February, by our estimates. However, we think room to the downside from there remains limited, largely because the risk the ECB cuts in April is somewhat restricted by the central bank’s own guidance.


Whilst a quiet data calendar saw GBP price action largely dictated on the other side of crosses last week, coming up, a whole raft of events should give sterling traders something to dig their teeth into. In terms of major UK events this week we have a CPI release on Wednesday, flash PMIs for March and Bank of England rate decision on Thursday, all capped off with retail sales data on Friday. All told, we expect this week to be sterling positive at the margin. Whilst CPI is set to fall, any drop should be modest, and having been widely anticipated by markets, this should limit any GBP downside. In contrast, Flash PMIs and the BoE meeting should both be outright sterling supportive. The former should once again indicate the UK economy continuing to outperform, while we expect a runback of February’s messaging in the case of the latter, an outcome which should be seen as hawkish in the context of other major central bank’s continuing to shift rhetoric towards an imminent start to policy reading. Admittedly, Friday’s retail sales data is expected to show a degree of mean reversion following a strong January print. Even so, this offers a low bar for an upside beat suggesting that risks heading into the event are skewed towards sterling strength. That said, any sterling outperformance is likely to once again be best observed on crosses, with a Fed meeting taking place in the US likely to muddy the readthrough for cable. Specifically, given our view that growth and inflation are worryingly soft in both the eurozone and Canada, any anticipated sterling outperformance being most noticeable against the euro and the loonie this week.



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