After touching fresh three-year highs over the last few trading sessions, the loonie starts this morning’s session on the back foot as it trades 0.2% down on the day against the US dollar. The mild risk-off tone seen in markets is propping the dollar up and causing procyclical currencies like CAD to retrace after their recent surges. This is seen across the board with EM currencies sitting in the red, while sterling and the euro also post larger losses than CAD. Today, building permits and international merchandise trade for March are due out at 13:30 BST, but the market focus will rest on US fixed income markets as the 10-year begins to move in a manner that caused a substantial rise in the US dollar back in Q1. For now, dynamics in the US Treasuries market are somewhat subdued, but speculation remains rife that the 10-year could climb back up towards 1.7742% – a level last seen at the end of March. CAD traders will also pay attention to Governor Macklem’s Senate Appearance at 23:30 BST today, however, his testimony is unlikely to differ from that given last week to the Parliamentary Committee. Focus on the Bank of Canada’s communications is likely to centre on Macklem’s speech on May 13th instead of testimonies to lawmakers.
The US dollar traded weaker across the G10 yesterday, offsetting Friday’s price action that was likely set in motion after the month-end portfolio rebalancing. This morning, the greenback pared back some of yesterday’s losses, leading broader gains across the entire G10 currency board, with NZDUSD and EURUSD close to breaking key levels. Yesterday’s data dock included a contraction of the ISM Manufacturing Purchasing Managers’ Index figure to 60.7 vs March’s 64.7, in contrast to market expectations of an uptick to 65.0 which may have put pressure on the US dollar with the reading marking a three-month low. The decline was broad-based this month, although employment and production posted the largest declines. With markets broadly expecting growth and inflation indicators printing at elevated levels for the coming period, due to the large fiscal stimulus and fast vaccination rates, the market reaction to strong data prints has been limited over the last couple of weeks as the US growth and outperformance story has been priced in by markets already. However, because of this, any surprise to the downside may have a larger impact on the US dollar as this goes against market expectations. Markets will therefore closely watch a series of data releases today, starting with the trade balance at 13:30 BST and factory orders and durable goods at 15:00 BST. Beyond this, comments by the Federal Reserve’s Robert Kaplan and Mary Daly at 18:00 BST will be eyed.
Yesterday’s session saw the euro slowly pare back Friday’s losses against the dollar amid broader USD weakness while the single currency also rallied against safe-haven currencies CHF and JPY following continued optimism in markets. Volatility remains limited this morning with another holiday-thinned APAC session, with EURUSD trading between yesterday’s already narrow ranges. Yesterday, Brussels came out with the news that starting in June, the EU will reopen to holidaymakers from countries with low Covid infection rates and to anyone who has been fully vaccinated. This combined with the gradual reopening in several parts of the eurozone, with France ending the 10km travel ban and the Netherlands enjoying al fresco dining, keeps the growth outlook positive. Today there are no data releases of note, meaning the focus turns to European Central Bank policymaker Francois Villeroy de Galhau who speaks at an investment conference at 09:00 BST for further comments on eurozone sentiment by the central banker.
The pound was the single best performer across the G10 space yesterday, trading in the green against the entire G10 board despite the domestic political affairs regarding PM Boris Johnson’s potential violation of expense rules and polls showing popularity for the ruling conservative party more than halving to a 5% lead. The currency only held onto its gains briefly before a bout of USD strength this morning pushed cable below its 50-day moving average. The Bank of England policy decision and Scottish elections on Thursday remain in focus for the pound in the second half of this week, but today’s price action will likely be at the mercy of broader developments in risk sentiment and USD moves. In the latter part of the week, however, the BoE decision will be key for markets as speculation is rife over whether the central bank will move on its QE policy. A minority of banks, such as the Bank of America, Mizuho Financial Group, Credit Suisse, ING and Natwest Markets anticipate the BoE to taper its current rate of QE purchases from £4.4bn a week at Thursday’s meeting. However, with the data not showing a definitive trend of what post-lockdown economic conditions look like and the May 17th deadline not a complete certainty, we expect the BoE to delay such a decision on its QE programme until May’s meeting.
The bounceback in the dollar this morning has been the largest against cyclical currencies, which is reflected in the fact that the Aussie and Kiwi dollars are leading losses in the G10 this morning. The Aussie’s losses partly reflect the comments made by the Reserve Bank of Australia this morning, however. The central bank upgraded its economic outlook as it now forecasts growth at 4.75% this year and 3.5% over 2022, but continued to reiterate that interest rates will be kept at emergency levels until at least 2024 as inflationary pressures remain elusive. The central bank shifted any other decisions to July’s meeting, where the exit strategy for its yield curve control programme and QE3 will be made. The central bank’s decision this week wasn’t expected to provide much more than it did given it came a week before the government delivers its annual budget, however, the fact that the central bank maintained such a dovish message in light of the forecast upgrades is telling for financial markets. For the Aussie dollar, which sits 0.55% down at the time of writing, RBA communications this week will be key, especially Friday’s release of the full summary of economic projections.