News & Analysis


To illustrate how benign yesterday’s session was outside of some selected G10 currencies, investors need to look no further than price action in USDCAD. The currency pair traded in an intraday range of a third of a percent over the course of the day, with what little volatility that did take place being driven by a choppy session in global bond markets. Today, cross-asset price action is likely to once again dominate how USDCAD trades, with little data released either side of the border ahead of tomorrow’s Canadian retail sales data for May.


Yesterday’s session was a bit of a snooze fest after markets settled down following the UK inflation data, with little notable catalysts for volatility. However, there was a sharp adjustment in the FICC space around 3pm BST when the New York cut takes place in the options market. This led the dollar higher, mainly against European FX, while a simultaneous sell-off in eurozone bonds also took place. While these moves were soon faded over the course of the afternoon session, the fact that this was one of the more notable events in FX markets yesterday suggests that traditional summer trading is finally setting in in-between major data releases. Outside of markets, the major news yesterday was that Russia has ended the Black Sea grain deal as of Thursday, a move that should raise renewed concerns over food inflation in parts of the globe and could potentially be a precursor to further weaponisation of commodities leading into the winter months.

Today the roster looks light once again after an interesting overnight session where the Chinese yuan rallied over half a percentage point on loosening regulations over home purchases and foreign borrowing alongside news that Beijing instructed state-owned banks to sell dollars in the offshore market. Meanwhile, the Australian dollar is also up eight  tenths of a percent, more than reversing yesterday’s losses after a stronger session for CNY and data showing employment grew by more than double the 15k expected. For the remainder of today, most of the focus likely to rest on EM central bank decisions (see below). However, the release of the CFTC commitments of traders report shouldn’t be overlooked as its latest data will now encompass the post-CPI period. The data will provide an indicative read on how positioning changed across most major currencies following the inflation release, likely confirming our hunch last week that a lot of long USD positions were neutralised in the back-end of the week.


EURUSD fell around 0.25pp over the course of yesterday’s session as the dollar continued to bounce back from last week’s sell-off. On the European side of the pair however, news was limited with final CPI readings broadly unchanged and little shift in tone from ECB speakers. Instead, moves were led by a modest sell off in euro area bonds, whilst events elsewhere took most of the market focus. Today looks set to deliver more of the same. With mostly third tier data coming out of Europe, the focus of attention will likely remain fixed elsewhere until next week and Monday’s flash PMI data is available to give markets an update on the state of European economic growth. This should see EURUSD continue to trade in its post-CPI range, a dynamic that we expect to persist for some time, unless next week’s PMIs show a considerable slowdown in growth.


The most notable piece of price action came out of the UK yesterday, where inflation numbers printed soft across the board, leading traders to pare bets on the degree of policy tightening necessary from the BoE. Understandably then, the main response in markets to June’s CPI release was in Gilt markets, where the 2Y yield dropped some 20bps. This was the largest drop in Gilt yields since March 23rd, when discounting the move last Wednesday following US CPI. As a result the pound also sold off over a percent, driven primarily by lower nominal and real yields, with the improved growth prospects providing only a relatively limited source of strength, but which ultimately allowed sterling to retrace modestly into the end of the session. For policymakers yesterday’s data has likely opened a can of worms. Markets are now pricing the next BoE policy meeting as a coin toss between 25 and 50bp of tightening, setting up a decision fraught with risk for both markets and policymakers when it is delivered on August 3rd. For the remainder of this week though, markets will continue to digest the inflation numbers, as well as the results of three by-elections to be held today in a litmus test of UK PM Rishi Sunak’s leadership, before retail sales data drops on Friday to provide an update on the condition of UK consumers.

FX Elsewhere – CBRT & SARB?

Today sees two major EM central banks step up to the plate, with decisions from both likely to have an influential impact on their respective currencies. Firstly, the Central Bank of the Republic of Turkey is set to raise interest rates at 12:00 BST, with most analysts looking for a 300-400bp increase in the one-week repo rate to 18-19%, which would mark a significant stepdown in the pace of tightening from the 650bps initially conducted by newly appointed Governor Erkan last month. While a more gradual pace of tightening has repeatedly signalled by Erkan over past weeks, any undershoot in the overall decision will likely spark a fresh wave of TRY selling not long after a semblance of calm had returned to the exchange rate. Shortly after the CBRT’s decision, the South African Reserve Bank will decide on whether to tighten policy or not. While most analysts look for a 25bp hike owing to the fact that the rand’s level of interest rate pickup remains low and inflation continues to track above target, the recent improvement in the currency’s fortunes and the economic outlook has left some analysts calling for no change. In our view, given the rand’s recent recovery has been driven by the removal of risk premium given cooling inflation pressures and more moderate loadshedding measures, with the subsequent leg lower in USDZAR driven by a soft US inflation reading, we think any decision by the SARB to hold rates won’t necessarily induce a widespread sell-off in the rand.



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