News & Analysis


With US traders back in the office after the Fourth of July holiday, volatility in USDCAD picked up on Wednesday. The move wasn’t too large in the grand scheme of things, considering the loonie weakened by a bit less than half a percent, although it was one of the biggest losers in the G10 complex. The broad dollar bid was led by safe haven flows on news of further weakness in the Chinese economy, a key source of global aggregate demand. But the loonie’s underperformance doesn’t mesh with what happened in the cross-asset space. Equities are generally more volatile than currencies, and yet the move lower on the S&P 500 was limited at -0.2%, while other correlated markets behaved in a way that should have translated to loonie strength. Commodities in general traded on a stronger footing and the US-Canada yield spreads narrowed in favour of Canada. One quirk in markets today was the divergence between front month WTI and Brent crude futures, which saw the former pick up by 2.9% but the latter only by 0.4%. Generally speaking, the spreads between these two grades of oil should remain roughly the same, and divergences tend to arise due to issues with storage capacity and the inability for physical traders to arbitrage the two. Today, the only Canadian data point will be the international merchandise trade balance, but as we’ve previously flagged, tomorrow’s jobs data will be the crucial piece of information that could shift market pricing for the Bank of Canada meeting next week.


The dollar began and ended yesterday’s session on a stronger footing after Chinese PMI data once again cast aspersions over the prospect of 5% GDP growth this year and the Fed’s June meeting minutes reiterated the central bank’s more hawkish bias. While the weakness in the Chinese activity data could ultimately be supportive for risk assets should it lead to a more prompt opening of the fiscal taps, in the interim, signs of slowing Chinese growth did little to dissuade traders from once again finding refuge the dollar where cash rates are north of 5% and economic data continues to outperform. It was the level of US interest rates that then took the greenback incrementally higher towards the end of the trading day as the meeting minutes from the Fed’s June decision highlighted that the choice to pause wasn’t in fact unanimous, as was sold by Fed Chair Powell in the press conference. In fact, “some participants indicated that they favoured raising the target range for the federal funds rate 25 basis points at this meeting or that they could have supported such a proposal.” Alongside a reiteration that “almost all” policymakers believed further tightening was required this year, as per the June dot plot, the minutes led front-end Treasury yields to trade just shy of 5%.

Coming up today will be a test of the US outperformance narrative, and an indicator of just how sticky domestic inflation pressures remain. ISM services PMIs are expected to tick up marginally, suggesting that a broadly anticipated US recession is not coming into sight yet. But it will be the prices paid index that many traders will have an eye on. Signs that cost pressures continue to ease would be a positive sign for policymakers looking to see that a tight labour market is only having limited passthrough into domestic inflation. On this last point, ADP jobs and JOLTS data are also due to land today. Whilst these have been deemphasised somewhat recently, they are likely still useful indicators for future Fed action, especially given that those policymakers favouring a further 25bp hike noted that the labour market remained “very tight”. Current expectations foresee both measures easing today, but not to the extent that policymakers can sleep easy, likely adding to the case for yet more Fed hiking. Given this outlook, today’s releases look likely to be broadly supportive for the dollar once again, as markets gear up for the release of key jobs data in the week’s main event on Friday.


Despite some pickup early in the session, EURUSD ultimately ended yesterday lower by around a quarter of a percent, as eurozone data delivered something of a mixed bag on the outlook for economic growth across the bloc. French Industrial production and manufacturing data surprised to the upside, suggesting that some unforeseen robustness might yet still exist within the eurozone economy. In contrast, PMIs across both Spain and Italy printed worse than expected, and revisions to French and German numbers also disappointed consensus expectations, doing little to dispel a narrative that the eurozone economy continues to slow at an increasingly alarming rate. This trend is likely to be confirmed once again today, with retail sales coming up at 10:00 BST, expected to show a contraction of 2.7% YoY. Despite signs of a slowdown, this does come with a silver lining for the ECB. Slowing growth should naturally translate into slowing inflation, a point highlighted by yesterday’s PPI numbers that undershot expectations once again. Showing a 1.9% decline MoM and 1.5% fall YoY, and given that the measure typically leads headline CPI, this is likely to provide policymakers with some confidence that policy rate tightening is continuing to slow the pace of price growth in the bloc. For the rest of the week, with a limited calendar coming up, attention will remain on the other side of the Atlantic, starting with the first US labour market and services ISM data due today, and the June payrolls report due tomorrow afternoon in Europe.


Despite little news of note out of the UK yesterday, Bank Rate expectations still climbed sharply over the session once again. Swap implied pricing now foresees a further 142bp of rate hiking in the UK, meaning that Bank Rate likely peaks at 6.5% if markets are correct. If this sounds fanciful, it pales in comparison to some analyst warnings that hit the headlines yesterday, including those from JP Morgan which suggested that Bank Rate high as 7% might be necessary to tame the UKs inflation problem. Despite this, comments from Andrew Bailey this morning indicated that he was still expecting a marked fall in inflation this year. However, given the Bank of England’s recent forecasting successes, markets will likely be looking to see the manifest in the data before really buying into this narrative. In this vein DMP outturns will be one to keep an eye on today, especially given concerns that UK inflation expectations might be coming unanchored given the persistence of underlying inflation. For the pound, yesterday’s moves in Bank Rate expectations did little to move the needle with today looking likely to deliver more of the same, with moves in sterling increasingly divorced from shifts in policy rate expectations as growth concerns weigh against the improving carry characteristics of the UK currency.

FX Elsewhere

The NBP is due to announce the outcome of their most recent policy meeting later today. We expect the MPC to keep the base rate at 6.75% once again, in line with market consensus. Market focus will therefore be on any commentary indicating that rate cuts could be on the cards for later this year. Having pivoted in a hawkish direction with their rhetoric earlier in the year, recent commentary has seen suggestions of 2023 rate cuts being to creep back in. A continued dovish shift in tone, in particular suggestions that any rate cuts could come before the end of Q3 this year are likely to weigh on the zloty, reversing some of the polish currencies recent strength.



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