News & Analysis


The loonie joined other commodity currencies to grind higher against the US dollar yesterday. This saw the Canadian currency carve fresh three-year highs as the tailwinds of the commodity supercycle came back into play. Data from Canada yesterday saw home sales in Toronto, Canada’s most populous city, fall over 19.7% in April from March, while Ottawa’s home sales rose by 163.7% YoY. While the data shows a marginal cooling off in housing activity, this is to be expected and will only continue as the BoC’s policy of QE tapering continues to allow bond yields, and in turn mortgage rates, to steadily rise. In this light, with the property market naturally cooling while fiscal measures also ease the pressure on property prices, the Bank of Canada is likely to take a sigh of relief. Today, the loonie is at the mercy of broader market dynamics as it joins NOK in sitting higher against the US dollar as oil prices climb back towards $66 per barrel. Economic data out of Canada will have to wait until tomorrow when key labour market data for April is released.


The dollar started yesterday’s session in a mixed fashion. Although upon closing the dollar continued to split the G10 currency board, with losses against AUD, NZD and CAD while posting gains against EUR and NOK, the size of the moves were much larger. The most notable move in yesterday’s G10 session was NZDUSD, which posted a 1% gain on the day after favourable Q1 unemployment data out of New Zealand. Events in the US yesterday saw a substantial upwards revision to the US services PMI in April, with the preliminary reading of 63.1 being revised up to 64.7. However, the ISM services index dropped in April from 63.7 in March to 62.7. However, despite the decline in the ISM index, its reading was still the second highest on record. The data continued to paint a picture of a strong rebound in the US economy, however, it did little to reignite the flame underneath the reflationary argument. Meanwhile, Fed members Evans, Rosengren and Mestyer spoke yesterday, while Vice Chair Richard Clarida downplayed inflation concerns in an interview with CNBC. Clarida encapsulated the FOMC communications yesterday in his interview, with all members, including the more hawkish Rosengren, downplaying inflation expectations and the argument to start talking about tapering policy. In this regard, focus on today’s Fed speakers will continue, with Williams, Kaplan and Mester all set to hit the wires in the afternoon of the European session.


The euro started yesterday on the back foot after it was hit by the USD harder than G10 peers. With no idiosyncratic factor at play, markets wouldn’t buy the story of a continued bearish EURUSD trend and the pair managed to resist further depreciation throughout the day, however the pair still closed out the session in the red. This morning’s session saw the euro rebounding with EURUSD and EURGBP rallying by 0.3% and 0.2% respectively ahead of the European Central Bank’s Economic Bulletin at 09:00 BST, although no tier 1 data is on the agenda for today. The Bulletin presents the economic and monetary information the Governing Council bases its decisions on and is released two weeks after each monetary policy meeting, so the euro may take cues from today’s publication. Beyond that, markets will focus on comments by ECB Vice-President Luis de Guindos at 11:30 BST, followed by President Christine Lagarde at 12:15 BST and Executive Board Member Isabel Schnabel at 14:15 BST. The ECB continued to ramp up the pace of its Pandemic Emergency Purchase Programme over the last few weeks, keeping up to its promise made at the March meeting. From here on, the question will be how and when the central bank will start to slow the pace of QE in the second half of the year.


Sterling continues to float within its recent 1.5% range this morning ahead of what is expected to be a more dramatic end to the week. Yesterday’s price action was rather muted for the pound with no major economic events on the roster, however, today sees the Bank of England release its latest policy decision at 12:00 BST along with its latest economic projections, while Governor Andrew Bailey is set to speak at 13:00 BST. Analysts are split as to whether the MPC will vote to taper their current pace of QE purchases from £4.4bn per week at today’s meeting, or wait until June/ September to deliver such a verdict. The answer really lies with how policymakers at the Old Lady view the reaction to consumer spending and business activity since lockdown measures were eased on April 12th. However, we argue that a few weeks of alternative data points are too noisy to draw any real inferences from, especially with regards to how this will look for the incoming hard data. Instead, in June, the BoE will have more solid data to assess the state of the economic recovery, which is why we believe the BoE will view this as the more likely meeting to announce a tapering at. However, with no press conference at the June meeting, Governor Bailey may set out the rationale behind the incoming tapering at today’s meeting, with the decision to execute such a policy taken at a later date. Meanwhile, as financial markets focus on monetary policy events around noon, large swathes of the UK electorate head to national and metropolitan polling stations. Today, elections for the Welsh assembly and Scottish parliament take place, along with a by-election in Hartlepool and mayoral elections in London. Most of the votes are unlikely to have much impact on financial market pricing, however, special focus has been on the result of the Scottish election of late after the SNPs 2011 majority resulted in an independence referendum being held in 2014. The risk remains that the SNP win another outright majority in the latest election and place substantial pressure on the UK government for a second independence referendum, although markets are viewing this risk as a tail risk at present. The results for most elections will be released over the coming few days.



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