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CAD
A grind lower for the greenback through Wednesday’s trading saw USDCAD fall 0.4% over the course of the day, with minimal news out of Canada seeing dollar dynamics take the lead for the pair. Further evaluation of CPI data and BoC Governor Macklems’s comments from earlier in the week offered little direction for traders, nor was there any notable fallout from the Federal Budget announcement, which largely met expectations. A blank data calendar and no BoC speakers of note means the rest of the week looks set to bring more of the same too, keeping the attention of loonie traders focused squarely south of the border.
USD
After a high octane period in markets following last week’s CPI print, price action in the FX space is starting to settle down. This began yesterday as the dollar found itself under pressure as US yields fell from their highs, a move that has extended overnight. Assisting this slight retracement in the dollar’s rally was a trilateral statement from the Finance Ministers of Japan, the Republic of Korea, and the US overnight, which showed greater coordination on monitoring moves in financial markets, specifically foreign exchange developments. Our read on the statement is that the US Treasury has effectively given both authorities the green light to intervene in order to prevent further FX depreciation in periods of acute stress, while greater coordination likely means joint intervention in order to increase the psychological impact. In combination with commentary from PBoC officials vowing to prevent the yuan from overshooting, the dollar has found itself trading under pressure overnight from the pushback from Asian policymakers, spearheaded by the Korean won which closed a percent higher. While we continue to see further upside in USD-Asia pairs due to the backdrop of higher-for-longer Fed policy and the impact that will have on global financial conditions, this is contingent on the moves being orderly and in line with economic fundamentals so as to avoid any retaliation from policymakers. To this end, yesterday we upgraded our Q2 and Q3 USDCNY forecast to 7.30, and our 12-month forecast to 7.0 (from 7.2, 7.0, 6.8 respectively).
Today, the economic calendar looks sparse once again, although a smattering of Fed officials are set to hit the wires. What will be interesting is if more members take the same stance as Michelle Bowman, who last night hinted that the Fed might need to hike rates once again, or whether the “higher for longer” stance remains the party line. All told, we suspect commentary from Fed officials shouldn’t upset the apple cart. This should see the DXY index trade in a limited range around the 106 handle.
EUR
The euro posted a sizable bounce in yesterday’s session, rallying 0.51% on the day to return to trade in the middle of our projection for Q2’s range (1.05-1.07). The rally itself highlights how the path lower for the euro is likely to be much stickier from here, which is why we don’t see the single currency trading to the lower end of this range until the back-end of Q2. This fact should be reinforced today by the ECB’s current account data for February. Currently, the eurozone economy is running a current account surplus of EUR39.4bn, a stark contrast to the EUR30bn deficit that was recorded back in 2022 during the peak of the eurozone energy crisis and when EURUSD last broke credibly below the 1.05 handle. If anything, with China’s economy posting strong Q1 growth, the current account surplus should continue to grow. Outside of the data, the economic calendar is light for the eurozone. On the central bank front, only Vice President de Guindos at 08:00 BST and Bundesbank President Nagel at 13:00 BST stand out as influential. All told, we suspect today will prove quiet for the euro, leaving it to trade just shy of our one-month forecast of 1.07.
GBP
A busy day for sterling traders ultimately saw the pound finish two tenths up against the dollar and three tenths down on the euro, as markets digested the UK’s March CPI reading and a whole raft of central bank commentary. Turning first to inflation, yesterday’s early morning release suggested that UK price growth remains a little stickier than expected by Bank staff back in February. Headline inflation fell by 0.2pp, taking the reading to 3.2% YoY which modestly overshot consensus expectations. Similar falls for core CPI growth and the services reading closely watched by the MPC, confirmed this message – that although UK inflation continues to cool, the BoE should not be cutting rates until August. While this has been our base case since the turn of the year, it was notable that a number of sell-side desks also chose to update their calls to match our own in light of this latest inflation print. Whether or not this view is shared by the MPC, however, remains to be seen. Pertinently, a speech by BoE Governor Andrew Bailey in Washington yesterday afternoon raised concerns that it may not be. While we are inclined to read Bailey’s speech as a little less dovish than markets, the level of confidence expressed by the Governor was surprising, coming just after the earlier inflation readings. In particular, Bailey described disinflation progress as broadly in line with Bank staff forecasts. While strictly speaking this is true given a typical forecasting error, this is still an odd way for the Governor to characterise an upside beat. Our initial read is that this has probably been overinterpreted by markets. Nevertheless, Bailey’s intervention yesterday highlights once again that risks of an earlier start to easing remain. This saw sterling abruptly U-turn on its post-inflation performance, generating losses against the euro in the session. Looking forwards, a quieter end to the week now lies ahead for sterling, and should provide an opportunity for markets to further parse Bailey’s commentary. Friday’s retail sales data should confirm the UK is set to escape recession without causing too many fireworks, while speeches by the BoE’s Greene, Ramsden and Mann are unlikely to offer little new information for markets.