News & Analysis


Price action in USDCAD was uneventful yesterday, especially in relation to last week’s flurry of activity. The 2-year yield spread between US and Canadian bonds narrowed further to -6bps as Treasuries slumped on a more dovish Fed while Canadian yields held up, meanwhile US equities were seen as fairly buoyant with the major indices up 0.2-0.9% on the day. Nevertheless, despite these supportive factors, the Canadian dollar found itself closing the day out marginally lower, likely due to flow and potentially a slump in crude prices from recent highs. Today, however, the loonie is likely to be driven by more local factors as June’s inflation report is published at 08:30 ET/ 13:30 BST. While there remains one further inflation report ahead of the BoC’s next decision in September, today’s report will nonetheless guide expectations of any potential further hike in the interim. Of note specifically will be the 3-month annualised measures of core inflation, which the BoC ejected from their communications during their brief interlude in the hiking cycle, but refocused on recently as they resumed tightening policy. Any signs in the measures that inflation pressures aren’t abating could see markets increase the likelihood of one further hike from 30%, an outcome that should narrow front-end rate spreads with the US and support another CAD rally.


What was notable in yesterday’s session was the relative inaction in FX markets following Chinese growth data that on most accounts underwhelmed expectations. While there was some impact on APAC currencies, with the Japanese yen firming and the currencies of other trading partners mildly selling off, the data didn’t induce a significant bid in the broad dollar. This suggests that potentially the slowing China growth story has now been factored in by markets, leading to some hesitation by traders to take the dollar higher in the face of the disinflation trend. In that respect, slowing growth conditions in the rest of the world may just provide the dollar with a floor as opposed to renewed upside. That is of course unless slowing growth conditions in Europe and China don’t turn into outright recessions.

Outside of the China data, most of the focus yesterday was on US-Sino relations as Treasury Secretary Janet Yellen spoke to media at the G20 summit in India following her visit to mainland China. Speaking yesterday on Bloomberg TV, Yellen highlighted that new sanctions would be narrow in focus and would be focused on new investments into China’s semiconductor, quantum-computing and artificial intelligence sectors. This came as good news for some companies exposed to China’s mainland market and growth profile as the announced measures were scaled back considerably and won’t come into effect until 2024 at the earliest. What may be of greater interest, however, was Yellen’s comments on the US economy, where she believes a recession is unlikely given the strength in the job market. This view was corroborated by Goldman Sachs, who in a new report downgraded their view that the economy would enter a recession in the next twelve months from 25% to 20% while simultaneously stating that the inversion of the yield curve isn’t a good barometer this time around. The view that the US economy is more resilient to interest rate hikes largely rests on the strength of the consumer, which will be tested today with the release of June’s retail sales. As cautioned yesterday, the data isn’t adjusted for inflation and thus is subject to interpretation, but should it show real consumption in Q2 expand, it will likely keep the recession calls at bay for now.


A quiet day for eurozone data yesterday is due to get an encore in today’s session, with nothing of note in the calendar set to move markets. This was certainly apparent in price action in EURUSD, which finished the Monday session up less than a tenth of a percent as it continued to settle into its new, higher post-CPI range. It was also notable that this occurred despite a raft of ECB speakers hitting the airwaves at the ECB conference on central, eastern and south-eastern European (CESEE) countries. For the most part commentary was a runback of the ECB’s greatest hits of recent months, with speakers sounding hawkish and markets paying little attention having heard it all before. An intervention yesterday by the ECB’s Visco was however notable, observing that inflation may come down quicker than expected. Whilst unlikely to move the needle when it comes to the next policy meeting on the 27th of July, it looks like the battle lines over a September rate rise are continuing to be drawn. Indeed, this may be followed up today by the ECBs Villeroy speaking in Paris, who has been one of the more notable doves in recent weeks. For now though, the euro looks likely to remain in these ranges until that is tested by July’s flash PMIs just days before the ECB’s next meeting.


With nothing in the data calendar and no speakers set to hit the airwaves, attention in the UK is likely to spend most of today’s session squarely focused on the release of June CPI numbers tomorrow morning. Headline inflation is set to fall once again, but with markets expecting a print of 8.2% YoY against the 8.7% seen last month the UK is likely to retain its status as an international outlier. For the policymakers at the Bank of England though, it will be core inflation that really matters. This is expected to show a repeat of last month’s 7.1% price growth, which whilst perhaps suggesting that underlying inflation pressures are topping out, would be far too high for comfort. That being said, the devil is likely to be in the detail, and signs that inflation is continuing to reaccelerate will all but guarantee a 50bp hike from the BoE in August. However, with May’s jobs market data suggesting that the UK labour market is beginning to soften, the door is open to a smaller 25bp hike on a downside surprise in tomorrow’s numbers. Given the importance of tomorrow’s data for the BoE, this is likely to be reflected in the performance of the pound. A hotter-than-expected reading should help support sterling in current ranges, but an undershoot is likely to bring with it a noticeable retracement back towards pre-US CPI levels.

LatAm FX

Once onshore markets opened, the Brazilian real was one of the standout currencies in the LatAm region, but not for the right reasons. Once again, the longevity of BRL’s high level of carry was brought into question as a narrower measure of inflation, the FGV IGP-10 series, showed deflation persisted in July with a reading of -1.1% while the GDP proxy data was seen as weak with a monthly reading of -2% for May. Following the mix of data, representatives of the Lula administration hit the newswires, as has become customary in recent months. This time, it was Finance Minister Fernando Haddad, who said Brazil’s activity data came in “as expected”, a jibe at the central bank of Brazil after he himself has advocated for looser monetary policy.  Coinciding with weaker activity data out of China which weighed on Brazil’s terms of trade, the data led BRL to soften by 0.6%. Forward cash rates for the next three months, which encompass August’s and September’s BCB meetings, now imply 75bps of easing, with further monetary easing being priced into Brazil’s swap curve further out at the 5-year following yesterday’s suite of economic data.



This information has been prepared by Monex Canada Inc., an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Canada Inc., or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.