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CAD
Friday proved a dramatic day for the loonie, with USDCAD falling by close to three quarters of a percent. The surprise undershoot of US jobs data combined with a hotter-than-expected reading north of the border conspired to put a rocket under the loonie and in our view all but confirms another rate hike from the BoC on Wednesday. Granted markets still view the upcoming meeting as being very much in play, assigning a two in three chance of another hike, but in our view the case is more clear cut given the net employment gain tripled expectations. Either way, the BoC will find itself in the hot seat on Wednesday. With little else of note in the calendar for this week as far as Canadian data is concerned, the message sent by this latest policy decision is likely to be critical for the loonies next leg, especially as it comes just hours after the latest US inflation reading.
USD
The broad dollar was on course to climb higher last week until a softer-than-expected US payrolls report put into question the possibility of a second Fed hike this year, sending the US 2-year back below 5% and the dollar tumbling alongside it. Notably, dollar downside was most pronounced against currencies where positioning was the most aggressive. For example, both JPY and SEK, two of the markets most bearish bets in recent months, led gains against the greenback, while the more defensive Canadian dollar underperformed despite strong data domestically. Following the big adjustment in the US dollar on Friday and data released last week that showed non-commercial investors turned net bearish on the dollar since March, the question now for traders is how much more downside is there in the dollar? June’s inflation report, released on Wednesday, should prove pivotal in the answer to this question. Expectations are for a slight rebound in the pace of headline inflation, while the core measure is expected to stabilise around 0.3% MoM. Both outcomes, if realised, should keep the Fed on a hawkish footing and the dollar subsequently supported. However, any weakness in either headline measures or the composition of the report will likely send the dollar tumbling back towards its year-to-date lows as the peak in US yields will likely be confirmed.
While the dollar’s fortunes are heavily tied to the next inflation report, it is worth noting that US data isn’t the only game in town for the greenback. Mounting external concerns are also a key source of support, evidenced this morning by the bid in the broad dollar after China’s inflation data for June raises significant deflation risks. Printing flat in June, headline inflation in China continues to highlight the absence of demand-pull pressures in the Chinese economy, while for the global economy an acceleration in PPI deflation from -4.6% to -5.4% YoY points towards further goods disinflation. While the data compounds the case for imminent stimulus in China, in the absence of such measures, developments in China are likely to continue to support the broad dollar as is the case today. Returning stateside, markets can expect fresh Fed commentary from the likes of Daly and Mester at 16:00 BST, and Bostic at 17:00 BST, all of which don’t have voting rights until 2024.
EUR
The single currency surged by 0.75% against the dollar on Friday, with the move coinciding with a downturn in US yields. Price action towards the end of the week highlighted the currency pair’s continuing sensitivity to rate differentials, a dynamic we think will prove influential once again this week with US inflation data released on Wednesday and the eurozone data calendar littered with ECB speakers and final national inflation readings. Despite last week’s rally, further upside in the EURUSD pair may be limited as ECB commentary is starting to become marginally more dovish, with Governing Council member Francois Villeroy stating that the central bank is nearly finished hiking rates and then will keep them at a “high plateau”, while the psychological barrier of 1.10 comes back into focus. The only scheduled event that could prompt a breach of the 1.10 handle this week is the US inflation data, which will have to see the monthly core measure drop to a level more consistent with 2% annualised inflation to warrant such a move higher in EURUSD. Also of note this week will be the latest edition of the ZEW survey out of Germany tomorrow, with markets wondering whether the deterioration of investor sentiment persisted into July.
GBP
The pound begins the week marginally weaker as markets prepare for what could arguably be a pivotal week for the Bank of England and their fight against UK inflation. UK labour market data out tomorrow will be a critical test for hopes that the recent re-acceleration in monetary tightening will not have to be repeated at the BoEs next meeting in August. Market expectations certainly see a possibility that the UK economy might have turned a corner on wage pressures, expecting that weekly earnings excluding bonuses, a key metric followed by policymakers, will only rise by 7.1% on a 3M/YoY basis in the upcoming release. This would mark a decline from the 7.2% seen in April, and provide some reassurance for policymakers that appear notably worried by the mutually reinforcing dynamic between wages and prices that appears to have taken hold in the UK economy. This concern was arguably on show once again by BoE Governor Andrew Bailey over the weekend, when he highlighted changing demographics and stagnant productivity as key challenges facing the economy over the coming years, complicating their fight against inflation. Despite this, markets for now seem mostly unperturbed, with longer-term concerns largely subordinated to the immediate problem of price growth that remains far above target. Today, with no data releases in the calendar of note, it will likely be a speech by Chancellor Jeremy Hunt on a series of planned City reforms that is the focus of attention for markets, before attention can turn to the main UK centric event of the week with labour market data due at 7:00 BST tomorrow morning.