News & Analysis


Price action in USDCAD yesterday was largely subdued, punctuated by two brief bouts of volatility that coincided with US data releases. First, US GDP and initial claims suggested that the US economy was even stronger than markets had thought, spurring a surge in global yields and the dollar. The loonie consolidated at this weaker level for a few hours before US housing sales data printed well below expectations. Following the second round of US data, the loonie recouped all of its losses, closing the day virtually flat. This was quite different from the experience in other G10 currencies, which broadly held onto losses on the day. Perhaps because Canadian yields managed to almost keep pace with US yields, rising by 14 bps across the curve and well-outpacing gains in Europe and Asia, the reaction to the housing data was stronger in Canada, allowing the currency to post the second-best performance in the G10 against USD. Today will be perhaps the most important day for Canadian data ahead of the July 12th meeting, with monthly GDP and the Bank of Canada’s business and consumers surveys all being released. Economists expect the data to reveal a 0.2% monthly gain for April, which would be in line with the typical pace of growth in so-called “normal” times.


As we cautioned in yesterday’s morning report, revisions to Q1 GDP in the third and final reading had the capacity to move the needle for how the broad dollar traded. Ultimately, that’s what occurred as growth was revised up 0.6pp to an annualised quarterly rate of 2%. Driving the upwards revision in Q1 growth was consumption, which was raised by 0.4pp to 4.2% QoQ annualised, with services consumption specifically revised much higher by 0.7pp to 3.2%. While a 2% growth rate isn’t necessarily strong, during this stage of the monetary cycle it is inconsistent with the Fed’s efforts to tamp down on inflation, especially given the strength in consumption and the risk that poses towards more persistence in non-housing services inflation. As such, the data saw 2-year and 5-year Treasury yields climb 15bps higher as markets rose bets that the Fed would have to once more after July’s meeting, most likely in November. The subsequent move in yields prompted a turnaround in the dollar too, sending the DXY index 0.4% higher on the day with gains most visible against the yield sensitive Japanese yen and the ailing Swedish krona.

Today, the main events for markets will be May’s PCE report, published at 13:30 BST. While some attention will be paid to the Fed’s favoured measure of inflation print, given the informational content has already been relayed to markets via the earlier CPI report, the relevant indicator will be the state of personal spending. How well the pace of consumption held up heading into the middle of Q2 will be key to whether the more hawkish Fed bets can hold up and the broad dollar can continue trading in the middle of its June range.


After rallying during the morning of yesterday’s European session following stronger-than-expected Spanish inflation data for June, the single currency’s fortunes quickly shifted as the support from higher eurozone yields was quickly negated by the rampant surge in US Treasury yields. After the third reading of US Q1 GDP, the single currency fell half a percentage point, back to levels last seen a fortnight ago before the ECB’s rate decision. Today, the dynamics driving EURUSD are likely to be the same as markets will receive flash data on the eurozone composite measure of headline and core inflation at 10:00 BST ahead of another update on the strength of the US consumer at 13:30 BST. In our view, given the national level inflation data has already primed markets for what the eurozone-wide data will look like, the main event will likely be the US PCE report this afternoon, where the risks are once again tilted towards US outperformance. Accordingly, we think the bias for EURUSD heading into the weekend is lower.

Elsewhere in Europe, it was a big day for the Swedish krona yesterday. EURSEK spent the session charting new highs in response to a policy decision from the Riksbank that largely disappointed markets once again. Whilst they did deliver 25bp of monetary tightening, in line with our call and the economist consensus, this undershot the one-in-three chance that the central bank would hike by 50bps in order to support the currency. Perhaps understanding this, the central bank revised up its forecast for the peak in policy rates to north of 4%, indicating that more monetary tightening should be expected later this year. But with the Riksbank’s credibility with the market in question, and policymakers increasing the rate of bond sales by less-than-expected, traders seem inclined to wait and see if further tightening is ultimately delivered. This saw EURSEK repeatedly hit fresh record highs throughout yesterday’s session, before ultimately closing just 0.3% higher on the day.


Sterling held its ground this morning against both the dollar and the euro as markets caught sight of the latest edition of Nationwide’s house price index release. Whilst the June figures were expected to show further declines in the UK housing market, prices actually ticked up by 0.1% this month, in contrast to the anticipated 0.2% fall. Granted the YoY figure still recorded a 3.5% decline, but this latest release marks a bright spot in what has otherwise been a grim array of news for the housing market. In our view though, this is unlikely to last. The recent rise in mortgage rates has likely come a little too late to really weigh on the June numbers, but further weakness ahead should be expected, as the full impact of more expensive mortgages and tighter lending criteria are increasingly felt. Beyond the latest house price data, this morning also saw final readings for GDP in Q1. The headline number contained little by way of surprises, indicating an economy that just about eked out expansion in the first quarter of the year. But capital formation and business investment were both revised upwards, painting a prettier picture of the UK economy than might be suggested by the top line numbers. Admittedly this likely reflects in part the distorting effects of investment tax incentives that ended in March, so judgement on the underlying strength should probably be reserved until Q2 figures are published.



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