News & Analysis


Yesterday was a reminder that in summer trading conditions, with thin liquidity, large moves are possible even with nothing special in terms of currency drivers. The day kicked off in risk-off mode, with weak Chinese export data being the main culprit for poor sentiment. This led to the usual equities down, USD bid reaction, but the magnitude of the move was noteworthy, with significant intraday USDCAD upside. Fresh headlines from Saudi Arabia—promising to keep crude oil production weak to support prices—helped WTI reverse its hefty losses and even pull off a 1% gain by close. The loonie got a boost, closing out the day a mere -0.4% weaker against the dollar, relatively unscathed compared to other high-beta peers. It is surprising that the loonie managed to somewhat keep pace with the dollar, at least relative to the rest of the G10, when the trade balance missed expectations by a billion to print at -$3.73bn, the deepest deficit since late-2020. The data calendar suggests FX markets should quiet down today with just building permits out of Canada, but after yesterday’s trading session, it’s clear that this is no sure thing. Tomorrow is another story, with US CPI being highly likely to drive significant currency volatility.


With the summer holidays in full swing in the northern hemisphere, news has been thin on the ground so far this week, as has liquidity in FX markets. Therefore, the big story of yesterday out of China led to some notable price action across currency pairs, as traders found something to finally sink their teeth into. Trade data saw notable falls in both imports and exports, with both posting double digit YoY declines, adding to concerns of weak domestic economic performance in China, as well as soft global demand conditions. The news saw a broad risk off tone dominate the day’s trading, with the dollar a notable beneficiary, leading the DXY index to climb by close to half a percent over the course of yesterday’s session. Whilst this was arguably also helped by stories around banking sector troubles that arguably weighed on FX markets at the margin, indications of US economic outperformance relative to China and the eurozone was the main driver of dollar strength.

This morning, Chinese CPI appeared to add once again to this narrative on first reading, showing outright deflation of 0.3% YoY. However, this slowdown was largely expected by markets, and core inflation actually rose to 0.8%, a level roughly in line with last year’s average. Whilst price growth at this level underscores both the need and ability for authorities to add more stimulus into the Chinese economy, the broadly on expectation print did little for the greenback, with the dollar index continuing to retrace some of yesterday’s rally as the sugar rush continues to wear off. Instead, today is likely to be spent looking towards tomorrow’s CPI release, an event that will be critical for markets in judging the path forward for the Fed. Signs of strength in the core inflation measure could see traders begin to re-engage with the idea of further Fed tightening this year, an eventuality that has been heavily discounted to date, adding to dollar strength. More likely though, the reading will confirm both our expectations and that of markets, that the Fed is done with monetary tightening, and attention will now turn to growth conditions and when the prospect of rate cuts will come into view.


In line with the pattern seen across FX markets, the euro also got caught up in yesterday’s broad dollar wave, falling just under half a percent against the greenback on the day. However, despite failing to post the same kind of reversals towards the end of the session seen across most other major currencies, this morning has seen a two tenths rally in EURUSD as the single currency finally begins to play catch up. Whilst some of this delayed reaction can perhaps be attributed to the impact of European summer holidays, news out of Italy may have also played some role in weighing on euro sentiment yesterday afternoon. Notably, the Italian government proposed a windfall tax on banks, a move that comes following a de-facto bank tax imposed by the ECB with the removal of remuneration on required reserves at the most recent policy meeting. Given the banking sector stresses of just a few months ago, the wisdom of this Italian move certainly appeared questionable in some quarters. Therefore, a rapid backtracking yesterday evening to significantly dampen the impact of the announcement has likely contributed to this morning’s delayed recovery for the euro. Looking forward, a series of second and third tier data releases is unlikely to drive significant moves in EURUSD today, with preparation for tomorrow’s US inflation data likely to be the key focus for traders.


UK specific news was thin on the ground on Tuesday, a trend that looks set to continue today with nothing in the data calendar to write home about. Despite this. price action for sterling against the dollar was significant, as the pound got caught up in the day’s broad risk off sentiment. The pair had fallen seven tenths by mid-afternoon before modestly retracing to finish down by 0.3%. Naturally, moves against the euro were more muted, with sterling managing to post a one tenth gain over the course of the day with market attention largely focused on events outside of Europe. The pattern of yesterday afternoon continues this morning, with the pound nudging up against the euro and the dollar again, with markets digesting yet more news out of China and preparing to gear up for US CPI tomorrow.



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