News & Analysis


Despite another rise in both oil prices and equity indices, the loonie still failed to outperform on Wednesday. Indeed, it was only after the disappointing US ISM print that CAD began to make gains against the dollar. While this now leaves the pair three tenths lower this morning, such performance remains underwhelming in light of what should have been a broadly constructive backdrop for the loonie. That said, with a key jobs release coming up on Friday, traders’ hesitancy to take CAD higher is understandable to us. Specifically, there is a significant risk heading into the event that a weak set of prints in Canada could contrast sharply with a strong set of readings south of the border. If this were to materialise, it could well be the catalyst to see BoC easing expectations detach from those for the Fed, especially coming less than a week in advance of the April BoC rate decision. To this point, arguably the most significant factor that has kept the loonie supported over recent weeks has been BoC easing expectations that have largely tracked those for the Fed, even as data suggests that the two should be diverging in light of contrasting economic fortunes. As such, a better than expected Canadian print tomorrow would be unlikely to disturb this dynamic. A downside surprise, however, could see markets sharply accelerating BoC easing bets. Risks heading into the end of the week look asymmetrically skewed towards USDCAD upside to us, with little room for the pair to appreciate on more hawkish BoC easing expectations in our view, but with plenty of room for a downside move.


The dollar DXY index dropped half a percent yesterday as Treasury yields fell from fresh year-to-date highs intraday to close marginally lower and equities bounced. This all occurred after March’s ISM services data was released, which allayed concerns over greater inflation persistence from the manufacturing report earlier in the week. Across all sub-indices, service sector activity was seen slowing, leading to a contraction in employment levels and a sizable moderation in input inflation. While markets took the data at face value, we cautioned against overinterpreting the results. After all, the ISM PMI has failed to capture the reacceleration in US growth and the continued strength in services employment since the turn of the year. Moreover, the prices paid index, which fell to a four-year low last month, hasn’t correlated well with the hard inflation data, where disinflationary progress has effectively stalled in recent months. Nevertheless, with the Fed’s more cautious tone exerting pressure on currencies across the board, signs that the data may soon turn more palatable sparked a relief rally across the board. Against this, Chair Powell’s repeated message of caution had little effect.

With the market firmly focused on the depth of the Fed’s easing path, and the dollar dancing to the tune of 2-year Treasury yields, the focus now turns towards tomorrow’s jobs report to cast the deciding vote ahead of next week’s CPI release. If expectations are met and the US economy adds another 200k+ jobs in March and produces wage growth north of 4%, we doubt the Fed will find sufficient confidence to move from their current conservative stance. While we see little reason for the jobs data to miss expectations seeing as it has been defiantly strong over the past six months, yesterday’s price action shows that there remains a large appetite to sell the dollar on any softening in growth and inflation conditions, suggesting risks tilt firmly to the downside for the dollar tomorrow.


Markets were positioned for a weak eurozone inflation reading to coincide with another strong US services PMI report yesterday. While the former occurred after multiple weak national readings, the latter did not. This resulted in EURUSD jumping half a percent, breaking back above 1.08 as a result. Focus heading into the week now turns towards tomorrow’s US payrolls data, before a US CPI print and ECB meeting next week become the centre of attention for EURUSD traders. On the latter, despite eurozone inflation printing below consensus expectations at 2.4% YoY, a 0.2pp fall from February’s 2.6% reading, we doubt this changes the narrative for either markets or the ECB. Indeed, ECB speakers continued to converge on the idea of a June start date for rate cuts yesterday in spite of this latest print. Instead, we think the conversation has now moved on to how fast future easing is likely to come. Indications that a pace of once per meeting is under consideration, as per our base case, should see EURUSD trading back down to the 1.07 level next week, more than reversing the pairs recent gains.

With little in the way of notable events for EURUSD today, focus instead turns to Switzerland this morning. The March CPI release recorded a notable flatlining in headline inflation on the month and reading just 1.0% on the year. With core CPI also declining to just 1.0 YoY, the weak print goes some way to validating the SNB’s surprise decision to cut rates last month, which now looks increasingly prescient. However, the data has been particularly volatile since the turn of the year, largely due to the big swings in supplementary accommodation, which this month subtracted 0.145% from headline inflation, more than reversing its contribution last month. Nevertheless, with markets now turning to the franc as a primary funding currency, today’s data does little to disrupt short CHF positions.


While yesterday’s US services PMI was sufficient to see the pound reverse month-to-date losses against the dollar, there was little new information out of the UK to dictate activity for the pair. This morning however, that should change, with the publication of the March Decision Maker Panel and final PMI readings for the same  month. The former is likely to be particularly closely watched by markets given that it is also closely scrutinised by BoE policymakers, and is expected to show that inflation expectations remain sticky once again, which should offer a modest boost to sterling in this morning’s session. Risks for the latter are also tilted to the upside, with the final manufacturing PMI seen earlier in the week having already seen an upwards revision, the balance of probabilities suggests a similar upgrade to the services print is likely. All told this should keep the pound trading with a modest bid into tomorrow’s North American jobs data release, which is still the main event for GBPUSD traders this week.



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