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CAD
The Canadian dollar was the second worst performing G10 currency last week, falling 0.45% over the course of the five sessions. The losses sustained over the final week of June saw the loonie drop from second to third in the G10 rankings for the month. Driving the weakness was a re-widening in US-Canadian front-end yield spreads after data out of the US drove Treasury yields higher while that out of Canada reduced the odds that the BoC would hike rates once again next week. Although the devil is within the detail when it comes to the inflation and growth data, which is why we have retained our call for another 25bp hike to 5%, the headline measures of inflation and growth present a far less compelling case than in June for the BoC to tighten monetary policy once again. With the data calendar in Canada now relatively sparse until Friday’s jobs report for June, how USDCAD trades in the interim will largely depend on how Treasury yields respond to the US data this week. However, with markets now viewing the BoC’s decision next week as a coin toss, the main event for USDCAD will indeed be Friday’s jobs report. Signs that labour demand is in fact softening and isn’t a case of one-off seasonal factors will likely tip the balance in favour of a hold. Given the loonie’s recent rally to levels last seen in November 2022 has been underpinned by more hawkish rate expectations, such an outturn poses the biggest risk in terms of volatility as it will likely drive a sharp retracement in the USDCAD pair.
USD
After sustaining losses for most of the month, the broad dollar traded on a more defensive footing last week as data continued to point towards a slower global growth outlook while simultaneously painting a picture of more robust growth in the US. The latter dynamic saw markets become more sympathetic to the Fed’s dot plot projections, with the probability a second rate hike in Q4 now priced at around 30% by swap traders. Most of this repricing occurred on Thursday after the third reading of Q1 GDP saw another upwards revision to the level of personal consumption, specifically services consumption. However, the rally in the dollar on signs of a more exuberant US economy was limited as data on Friday showed growth momentum didn’t remain as robust in the early parts of Q2. Real personal spending in May was reported as flat and April’s data was heavily revised down from 0.5% to 0.2% MoM. The concoction of faster growth momentum at the start of the year and premature signs that the consumer is starting to come under pressure in the second quarter has left markets in limbo when it comes to pricing the Fed’s likeliest policy path this year. As such, the DXY index is also trading in no-mans land; up 0.87% on June’s lows but 1.5% below its high.
This week, that could change as markets receive the meeting minutes from the Fed’s June decision where they chose to temporarily pause the hiking cycle, the latest round of ISM PMIs, and most importantly another nonfarm payrolls report. After May’s jobs data showed conflicting signs between the household and establishment survey, US monetary policymakers resided to the idea of a pause in the hiking cycle in order to await further information. However, strength in the establishment data specifically and the risk a hot labour market poses to inflation persistence meant that the central bank’s communications retained a hawkish bias. With initial claims data trending higher and growth conditions seen as softening, the question for markets this week is if this is going to start appearing in the overall employment levels, or if once again signs of re-emerging slack will only become visible within the household survey. If the former, the dollar is likely to take a leg lower, with the DXY index likely to test its June low of 102. If the latter, markets are likely to continue bending towards the Fed’s forward guidance. This should see the dollar trade on a more supported footing.
EUR
More hawkish commentary out of the ECB last week did little to move the single currency, with traders instead deferring to the economic data. On that, a softening in headline inflation in June was looked through by markets, with the uptick in the eurozone core measure seen as more influential on the ECB’s reaction function. This has kept markets in limbo when it comes to September’s meeting, with a 56% probability of another 25bp rate hike now viewed as the base case in swap markets. With little in the way of eurozone data this week, and ECB speakers unlikely to provide fresh information following the litany of commentary at Sintra last week, the prospects for the single currency this week seem dependent on how fixed income traders interpret the US data.
GBP
Having rallied strongly on Friday, it has been a relatively quiet start to the week for sterling so far, down around two tenths against the dollar and trading flat against the euro to start this morning’s session. The upturn in GBP strength towards the back end of last week came as house price data and final GDP readings pointed to yet more unexpected strength in UK economic conditions, even in the face of Bank Rate expectations that have continued to climb. Given the relative sparsity of data this week such a move looks unlikely to be repeated. Whilst markets are due to see final readings for June PMI numbers, barring a improbably sharp revision these are unlikely to shift the needle as far as traders are concerned. More relevant are likely to be outturns from the decision maker panel survey on Thursday. Expectations of price growth that form part of the survey have been trending broadly lower, but with signs of progress stalling in recent releases. For this reason, further evidence suggesting inflation is becoming more embedded could set alarm bells ringing once again for markets. Outside of the data, the only speakers of note are Catherine Mann on Thursday, before comments from BoE Governor Bailey on Sunday. With little data of not and few speakers scheduled so far, things look set for a quiet week for the pound.
FX Elsewhere
The Australian dollar leads losses once again in the G10 this morning as the Melbourne Institute’s measure of inflation for June cooled from 0.9% MoM to just 0.1%. While the monthly measure is incredibly noisy, it adds to the general theme of more palatable data releases since the RBA’s decision last month to resume its hiking cycle. While the details of most data releases in the past month can give the RBA some cover if it chooses to hike the Cash Rate target once again in the early hours of tomorrow, we think that such an outturn is unlikely. Seeing as the RBA meets once a month as opposed to every six weeks to a quarter, and given the DM hiking cycle has generally slowed in pace in Q2, we think the RBA is more likely to take another meeting to assess the data before hiking rates once again. Swap traders tend to agree, with the probability of a rate hike overnight sitting at just 17%, although the split amongst economists polled by Bloomberg is much more split, with just 14 out of 27 analysts predicting a hold.