News & Analysis


Volatility in USDCAD stepped up yesterday following the release of US initial jobless claims, with the pair rallying 0.5% in the hours after. While the reaction to the jobs data was significant, in the grand scheme of things the move was minor as the pair closed less than a tenth of a percent higher on the day and continues to trade in the middle of its recent range. Today, the loonie is back on the offensive in what is setting up to be a risk-on session, although the extent to which CAD can continue to rally depends on how May’s retail sales land at 08:30 ET/ 13:30 BST. Any positive beat in the data will undoubtedly feed into fears that the BoC’s hiking cycle isn’t over, especially after data earlier in the week showed underlying inflation measures remained intolerably high for the central bank. With pricing of a further hike in September already at 41%, today’s retail sales data is unlikely to tip the balance north of 50% given there remains a further jobs and inflation report, however, it would add further support for the current market base case.


The dominant theme in markets this week has been a partial retracement of last week’s post-CPI reaction in US assets, primarily US Treasuries and to a lesser extent the dollar as equities continue to rally. Yesterday’s session was no exception as 2-year yields rose 7 basis points and the dollar DXY index  climbed six tenths of a percent, although equities did finally drop. Driving the extension in the dollar’s recovery further above the 100 level was initial jobless claims data, which once again suggested that the labour market although cooling isn’t necessarily leading to a rising unemployment rate. The data, alongside strong core retail sales earlier in the week, acted as a reminder to markets that bought heavily into the disinflation trade last week that the path lower in the dollar wasn’t going to be as smooth as the early reaction to June’s CPI report suggested. Feeling the brunt of the dollar retracement were currencies that gained heavily last week from the flush out of long dollar positioning last week, with HUF, CHF and SEK all sitting at the bottom of yesterday’s rankings.

In emerging markets specifically, the muted performance of the South African rand and the Turkish lira was surprising in an environment of rising US Treasury yields, especially as both respective central banks dovishly surprised consensus expectations yesterday. The CBRT hiked by just 250bps to 17.5%, undershooting consensus expectations of a 350bp increase. The more moderate rate hike was accompanied by a statement that now outlined that the central bank has “made decisions on quantitative tightening and selective credit tightening to support the monetary policy stance”, suggesting greater emphasis remains on macroprudential measures despite a vow to return to more a more orthodox policy framework. As was the case at the past decision, the tighter macroprudential measures are being drip fed to markets following the decision, with the first coming this morning in news that bank’s holding FX-protected lira accounts would now be subject to a 15% reserve requirement; a move that will tighten credit availability. Meanwhile, in South Africa, owing to improvements in inflation data and less inflationary market conditions (stronger rand and weaker commodity prices) the SARB voted 3-2 to hold rates at 8.25%. While just a few weeks ago this would have sparked an aggressive sell-off in the rand, the meagre 0.25% rally in  USDZAR yesterday underscores how much the currency’s fundamentals have improved.

Other dominant themes this week have been the slight retracement higher in USDJPY and pushback from the People’s Bank of China against CNY depreciation. Both of which have continued again in the overnight session. For USDJPY, the slight rally is notable as it coincides with a broad softening in the dollar against G10 currencies and follows on from still strong national CPI data for June. The move is indicative of speculative positioning on BoJ tightening next week being pulled from the market after Governor Ueda’s comments earlier in the week and the modest increase in core inflation to 3.3% isn’t seen as enough to tip the balance. Meanwhile in China, the daily countercyclical factor was once again present, although the -452 pip pushback was slightly larger than yesterday’s -680 pip spread. This has seen USDCNY drop by just 0.13%, trimming losses on the week to just -0.36%.


Capping off a quiet week in the eurozone, retail sales out of France is the only data release of note. Printing at -2.0% YoY in June, this did mark a significant uptick from the -5.4% recorded in May, albeit this is still hardly positive news for a French economy that looks to be struggling for growth based on recent data points. A better signal in this respect will come next week with the release of eurozone PMI figures. French numbers are expected to repeat last month’s dubious honour of printing sub 50 across the board, pointing to a broad slowdown in French economic activity. French underperformance is also expected to weigh on aggregate figures for the euro area as a whole, with the composite eurozone figure expected to print at 49.5, suggestive of economic contraction. Indeed, emerging signs of a slowdown in growth may be one reason for the recent dovish pivot by ECB speakers in recent days. Whilst we still anticipate a 25bp hike from the ECB next Thursday, weak growth figures and a softening stance by the ECB is likely to throw doubt on the idea of any further policy tightening later this year. This dynamic should weigh on the euro over coming months, but for now, price action in EURUSD remains a function of events on the other side of the Atlantic. A six tenths fall yesterday on the release of US data saw the pair break to the downside out of recent ranges. But a quiet end to the week looks in store with little data out for the US today too.


Mixed signals out of the UK this morning may have left traders scratching their heads. On the one hand the GfK Consumer confidence index significantly undershot expectations for the June reading printing at -30, breaking a four month streak of improvements for the indicator. On the other hand, retail sales excluding auto fuel data showed an expansion of 0.8% MoM in June, well above pre-release consensus which looked for a 0.2% print. Granted YoY figures still showed a -0.9% contraction meaning that consumer activity is still far from robust and the monthly data can be chalked down to one-off factors, but an uptick in consumer spending will nonetheless be a concern for Bank of England policymakers who would like to see further signs of economic cooling. Better news though for the UK government this morning, with public sector net borrowing figures showing coming in lower than expected for June, accompanied by a substantial downwards revision to May borrowing figures as well. The undershoot came as high inflation boosted tax receipts by pulling earners into higher tax brackets, whilst borrowing costs actually fell compared with the same period last year. For the pound, this morning’s data was only marginally positive with sterling picking up around one tenth against the euro and two tenths on the dollar to start the morning session.



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