News & Analysis


The Canadian dollar rallied strongly at the US cash open, with very little else in the way of catalysts. A catch-up effect from the earlier rally in high beta FX and crude likely contributed, with traders merely awaiting the cue from the equity market before diving into the loonie. With risk conditions broadly shifting today, however, CAD has already given up most of yesterday’s gains as it continues to trade around our end of July forecast of 1.32. We don’t expect the currency pair to break out of its recent range until Friday’s payrolls release, meaning the next few days are likely to be uneventful and driven by external factors.


The big news in markets yesterday was the notice that the Bank of Japan were once again active in the bond market, reinforcing their commitment that the previous yield curve control framework has now merely been made more flexible rather than being expanded outright to +/- 1%. While this weighed heavily on JPY, it did little to dampen risk sentiment in currency markets as yesterday’s session was also characterised by the rally in high beta FX. APAC currencies led gains, aided by the further growth measures announced by Beijing and their lack of participation in Friday’s sell-off in the dollar outside of local trading hours, while following just behind were other high beta currencies like CAD. Month-end flows likely played a role too, especially given the consistent shift in positioning throughout the course of July on falling and then rebuilding Fed expectations. However, in terms of data, there was very little announced during the trading hours that saw the major moves in markets, although economists did take note of the outcome of the Fed’s Q2 Senior Loan Officer Opinion Survey that came out shortly after. Like the ECB’s Bank Lending Survey last week, the Fed’s SLOOS showed credit conditions broadly tightening and loan demand falling off. The most notable outcome of the survey was the number of lenders reporting tighter consumer credit conditions. At 36.4%, this was the highest since 2Q09, while the demand for auto related loans and other consumer loans, largely seen as those for more durable goods, also fell off. In summary, the SLOOS showed historical signs that a recession in the US was likely, pushing back on the recent soft landing narrative that had built up on the back of falling inflation and resilient growth data. However, the outcome wasn’t damning enough for markets to necessarily sit up and take immediate interest. Today the data calendar is once again light, with just the ISM manufacturing PMI released at 15:00 BST of note.


The single currency finished yesterday’s session broadly flat, even though the advanced reading for Q2 GDP saw the eurozone expand at a quicker pace than expected and core inflation print marginally above expectations. While on the surface the improved growth data suggests the chances of the ECB hiking in September have increased, ultimately the headline figure was subject to a few questionable developments. Ireland’s volatile growth data added 0.1pp to the topline figure, thus providing the surprise to expectations, while it is noteworthy that both Italy and Germany saw growth fall below expectations. Furthermore, the other positive surprise outside of Ireland took place in France, where transitory factors spurred growth in the second quarter. What was of concern, however, is the continued strength in core inflation and more specifically services inflation, which printed at an estimated rate of 0.43% MoM and 0.51% MoM respectively. Nonetheless, set against the backdrop of still weak growth conditions under the surface, we note that the first core inflation release of two before the ECB’s September meeting isn’t enough in isolation to tip the ECB into further hikes. For that, we think data showing continued inflation pressures from the labour market is required. To that end, today’s unemployment readings out of Germany (08:55 BST) and the eurozone as a whole (10:00 BST) will be seen as influential. Currently, markets only see a 35% probability of a September hike, down from 40% last Friday.


Similar to the euro, price action in the pound yesterday was nothing to write home about. The muted price action likely reflects some hesitation amongst traders ahead of this week’s crucial BoE decision on Thursday, where a 25bp hike is widely expected but there remains a credible risk of a second 50bp increase. In our view, 25bps is welcomed by the recent inbound data, but given the BoE has recently been burnt on its more optimistic view on the course of disinflation and the fact that services inflation remains uncomfortably high, it is highly likely that they will opt for a larger move to consolidate the recent disinflationary progress. In our view, a 50bp hike is the clearest bull risk for Thursday’s meeting, whereas the market reaction to a 25bp hike is dependent on the corresponding forward guidance. Data released overnight compounds our base case for a 25bp hike, with the BRC shop price index reporting price increases in non-food goods fell at the sharpest rate since January 2022. This arguably contributed to sterling’s marginal weakness this morning, although it is unlikely that the second-tier data tipped the scales within the MPC.

FX Elsewhere

The Australian dollar led gains in the G10 yesterday, with the 0.8% rally against the greenback explained partly by further stimulus measures out of China, a retracement of Friday’s losses which occurred in a broadly softer USD environment, and some pre-emptive buying ahead of this morning’s RBA meeting. However, it is the latter that has led the Aussie to now sit firmly at the bottom of the G10 leaderboard, retracing all of yesterday’s gains overnight as the RBA undershot consensus by holding the Cash Rate Target at 4.1%, in line with our expectation. The RBA’s decision allowed policymakers “further time to assess” the impacts of their previous actions, although the accompanying statement maintained its hiking bias that “further tightening of monetary policy may be required”. All told, the decision broadly met our expectations as we think the RBA is unlikely to move until it has Q2’s wage price index data at its disposal. Released mid-August, should the data show wage pressures remain firm amid a historically tight labour market, we expect the RBA to hike once more to a terminal rate of 4.35% at September’s meeting, with risks that any further action is delayed until November to synchronise with the next projection round. In the interim, given the RBA has now also signalled it is close to its terminal rate by moving in a more cautious manner, we expect upside in the Aussie dollar to remain capped unless China finally announces more traditional commodity-friendly stimulus measures. For now, all eyes turn to Friday’s Monetary Policy Statement for the updated economic forecasts.



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