With positioning against the dollar significantly more neutral heading into last week’s CPI report, the Canadian dollar benefited the least from the unwind of dollar longs, placing it at the bottom of the G10 pile by a considerable amount despite the currency also benefitting from a relatively hawkish Bank of Canada, an uptick in US equities, and a continued rebound in crude. The loonie’s inability to post significant gains in this environment underscores our view that the path to our 3-month target of 1.30 will be slow going, unless of course the Canadian economy continues to exhibit greater economic resilience and inflation persistence than the US economy, thus forcing markets to once again narrow interest rate differentials. This Wednesday’s inflation report for June could start that process, however, we don’t expect markets to heavily buy into the idea of another BoC hike on that single data point, mainly because there is another CPI release ahead of the BoC’s September 6th meeting. That said, with markets pricing just a 31% probability of another 25bp hike, there is some scope for more hawkish expectations to be priced in. Thus, strength in core inflation pressures this week could see CAD end the week closer to the top of the G10 pile, a marked turnaround from last week’s performance.
After the dollar recorded its worst week since mid-November following Wednesday’s inflation release, the question for traders this week is if the greenback has started a secular decline or whether the post-CPI adjustment was one that merely sent the dollar into a lower range. This morning’s price action doesn’t necessarily tip the balance one way or the other, even after China’s Q2 growth data undershot already depressed expectations. Despite the quarterly growth rate meeting expectations at 0.8% QoQ and June’s activity data printing on the stronger side, growth on an annualised basis fell significantly short of the 7.1% consensus at a registered rate of just 6.3%, suggesting significant revisions were made to previous quarters growth rates. While weak growth conditions outside of the US is one of the key arguments for the dollar to remain supported from a significant rout, dollar upside this morning is largely concentrated to currencies with links to China’s growth profile, with price action largely muted elsewhere.
With the Fed embarking on a communications blackout ahead of its July 26th meeting, price action this week will be interesting as US rates traders are left without a chaperone and the data calendar is absent of top-tier US releases. This means positioning is likely to be in the driving seat. Although not a major piece of data, June’s retail sales tomorrow will be a key event to watch nonetheless. Previously strong consumption data out of the US underscored the Fed’s concerns over inflation persistence. Should tomorrow’s data print on the stronger side of expectations, and more importantly close out Q2 above the corresponding rate of inflation, markets may begin to become more sympathetic to the Fed’s messaging that the inflation battle isn’t over just yet despite last week’s constructive inflation release. This, alongside weak growth indicators in other major economies, could give the dollar a stable base to retrace part of last week’s losses, although we expect any upside to be capped significantly below last week’s pre-CPI levels.
Having recorded a stunning rally against the dollar last week, rising almost 2.5%, there is little in the data calendar to knock the euro off its new found perch this morning, or indeed coming up later this week. As such, last week’s surge looks to be a reset higher for EURUSD ranges, absent any external shocks. Comments from central bank speakers may be worth keeping an eye on however, with multiple ECB members including president Lagarde due to speak at the 9th ECB conference on central, eastern and south-eastern European (CESEE) countries. Whilst we don’t anticipate a shift in tone with a policy meeting less than two weeks away, signs that cracks are beginning to open up in the hawkish consensus could weigh modestly on the euro. In our view though, with little market moving data forthcoming this week for the eurozone, it also seems likely that ECB policy makers will wait until after the upcoming rate decision to begin fighting in public over the terminal level for eurozone policy rates, a dynamic that should keep the euro range bound for the time being.
Housing was top of mind once again this morning in the UK, with the release of Rightmove house price index highlighting yet more weakness in the British housing market. The index showed that prices fell by 0.2% MoM in June, following a flat print in May, and rising by just 0.5% YoY, again down from last month’s reading of 1.1%. Granted this looks somewhat better than other housing market indicators have shown in recent weeks. But this is largely a function of methodology, with the Rightmove index reflecting the asking price of properties rather than the ultimate sales price, meaning that the reading is likely overestimating the strength of the housing market under current conditions where forced sales are largely absent. The upshot is that this latest print adds to a growing body of evidence for a slowing housing market as monetary policy continues to weigh heavily on this part of the UK economy. Whilst this is not the most significant market-moving release in isolation, sterling has drifted lower this morning nonetheless, down marginally against both the euro and the dollar. But whether or not a retreat from last week’s YTD highs is sustained going forwards will likely hinge on Wednesday’s CPI data, with the upcoming inflation print critical for the BoE’s August policy meeting.