News & Analysis


The loonie depreciated on Friday despite a strong job market print that put more pressure on the Bank of Canada to expeditiously raise its policy interest rate. That’s because the move in the US dollar following the May CPI print overpowered everything else going on in markets. The Canadian yield curve, similarly to the US curve, also bear flattening with the Canadian 2Y up 17.6bps to 3.24% and the 10Y up 11.4bps to 3.34%. Overall, despite the big moves in Canadian bond yields, they couldn’t keep up with the rapid rise in US yields. The loonie’s weakness was largely a result of the fundamental widening of the US-Canada interest rate differential, and amplified by poor risk sentiment in equities. This morning, the risk backdrop remains in tatters after the higher interest rate storm rolled into town. Amid this backdrop, the loonie continues to trade weaker, with losses likely to be extended should North American equity performance deteriorate further after markets cash open.


King dollar led the G10 once again on Friday after a hot CPI print suggested to markets that the Federal Reserve will need to move more aggressively to cool inflation. Following risk-off trading sessions in the Asian and European equity markets, the inflation data put further downward pressure on US equities after North American markets opened, while stimulating a large move in US bond yields. The S&P 500 closed 2.91% lower than the day before, while the US treasury yield curve bear flattened with a 24bp increase in the 2Y yield to 3.06% and a 10.2bp rise in the 10Y yield to 3.15%. The shift in fundamentals, along with a haven bid from poor risk sentiment, were highly supportive of the US dollar move that saw the DXY rally almost a full percent above 104. This morning, markets have picked up where they left off on Friday, pricing higher US interest rates following the strong inflation print. Money markets continue to wager on the possibility of a 75bp hike from the Fed (around 20% probability), which is mapping into other G10 interest rate products, while equity futures continue to trade in the red after a rough session for equities in the APAC region this morning. Meanwhile, US Treasury yields continue to rise across the curve, with the 2-year now yielding a 15-year high of 3.15%. The combination of higher US yields, prominent growth risks in Europe and China, and pressure on global equities continues to feed into the dollar this morning. We expect this dynamic to persist today with very limited releases scheduled in the data calendar.


The single currency slipped nearly a percentage point on Friday as higher US yields and a downturn in equities weighed on broader market sentiment. Amid the current environment of higher US yields and lower equities, the direction of travel for EURUSD has been one-way, especially as peripheral bond spreads continue to widen in the eurozone, risking further market fragmentation. An abundance of ECB speakers this week, beginning with Robert Holzmann at 09:00 BST today, will likely see central bank officials reaffirm their stance that they will backstop any further widening in bond spreads. However, without clear rules of engagement, markets will likely continue to pressure the ECB’s tolerance as they attempt to define the parameters for intervention. Higher risk free rates in the US aren’t aiding the problem this morning, with the near 10bps rise in the US 2-year dragging front-end BTP yields substantially higher too.


After selling off on Friday following strong US CPI data, GBPUSD is back under the pump this morning as a combination of a deteriorating risk backdrop and a slip in April’s GDP data weighs on sentiment. This morning’s growth data saw the UK economy contract by 0.3% MoM in April, undershooting expectations of a 0.1% expansion. GDP is now 0.4% below its January 2022 peak and is on track to disappoint the Bank of England’s Q2 projection of a 0.1% expansion in quarterly terms. While the underlying data suggests the UK economy isn’t in as bad shape as the headline figures suggest, today’s data release effectively kills the chance of a 50bp hike from the Bank of England on Thursday in our view. Clear signs that the UK economy is stagnating, coupled with limited evidence that inflation expectations are seriously de-anchoring, suggests that the BoE will form a consensus around another 25bp hike at Thursday’s meeting. The question for markets will then centre on the sustainability of the current hiking cycle given the deteriorating growth backdrop. With overnight index swaps currently pricing in a 40% probability of a 50bp hike by the BoE on Thursday, and a cumulative seven 25bp hikes by year-end, we expect the dovish repricing will continue to weigh on the pound this week. Downside pressure on the pound will take a political nature too as Boris Johnson risks reopening old wounds by tabling a motion that will allow ministers to override parts of the Brexit deal.


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