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BoC minutes shouldn’t offer too much of a directional change for CAD

Published 2024-06-17, 10:11 a/m

CAD

While the loonie is likely to get off to a slow start to the week, with a light data calendar leaving USDCAD price action to be dictated by cross asset condition and events in the US, the BoC’s Summary of deliberations on Wednesday stands out as a key event for loonie traders. Expected rate differentials remain a major driver for the pair, and while the Fed poured cold water on the prospect of imminent easing in the US last week, there is an open question remaining as to whether the BoC delivers back-to-back rate cuts, following up their cut this month with further easing in July. Markets currently price the likelihood of this outcome at 70%, and Governor Macklem has done little to dispel this narrative since the June meeting, at least so far. We think the data warrants rapid easing from the BoC, arguing in favour of a series of consecutive cuts in the absence of verbal any resistance from policymakers. An endorsement of this view in the summary of deliberations would likely see Canadian rate cut expectations further accelerated, weighing on the loonie. More likely though, the Governing Council will prefer to keep their options open for the time being, suggesting messaging that is either relatively neutral, or offers modest pushback on current market expectations. If realised, the latter scenario should see the loonie making modest, albeit temporary, gains this week.

USD

The broad dollar index ended the past week up 0.63%, even as domestic inflation conditions were seen cooling and paving the way for the Federal Reserve to ease policy as soon as September. As we have mentioned in recent months, the path lower for the dollar remains narrow and highly vulnerable to sharp retracements. On the one hand, stronger domestic growth data and concerns over inflation persistence remain plausible, although a less prominent risk factor given data showing a sequential slowdown since Q1. On the other hand, the dollar’s defensive attributes remain a key avenue of strength, as has been seen over previous weeks. The sudden stop in US core inflation has raised some eyebrows in markets, and when combined with another jump higher in initial jobless claims, it has left some corners of markets questioning if something more sinister is afoot in the US. This would see any subsequent Fed easing occur in a risk-negative environment, which isn’t necessarily dollar negative. Moreover, the outlook for the Fed is no longer the only game in town. As seen over the past weeks, political risk is entering the market landscape, and with the US presidential election only set to become a more prominent consideration for markets over the coming months, we suspect it will continue to support the dollar.

Over a shorter horizon, we suspect market conditions will also remain conducive for more dollar strength. Data out of China this morning showed the economic transition towards a more consumption-dependent model remains sluggish and fraught with risk. While retail sales for May beat expectations at 3.7% YoY, led by stronger services growth, the positive readthrough for markets was undermined by weak industrial production growth and housing market data. The latter is especially pertinent given the risks it poses to consumer sentiment and that it follows another round of housing easing. On the whole, the data warrants further easing from the PBoC, but given the implications this has for the PBoC’s policy stance on the yuan, we don’t expect rate cuts in China until the Fed’s easing cycle has begun. This should keep growth sentiment in the region pinned, capping the extent to which non-Japan Asian (NJA) currencies can rally over the coming quarter. This view should be confirmed on Thursday when major banks announce the latest Loan Prime Rates out of China, where we expect no change following today’s hold in the medium-term lending facility.

Central bank policy should remain a key focus for markets for the remainder of the week, with decisions due out of Australia, Norway, Switzerland, the UK,  and Brazil. We expect a cautiously hawkish message to be delivered across all, with announcements out of Switzerland and Brazil posing the most uncertainty. As we noted in our SNB preview over the weekend, domestic data and improving external growth conditions warrant the SNB holding this week, but our confidence in such an outcome has been steadily reduced by CHF appreciation in recent weeks. Moreover, in Brazil, political pressure may see the BCB continue to ease policy by 25 basis points, even as the data suggests otherwise. Should the BCB hold policy, political pressure may only increase, jolting investor sentiment and prompting another round of BRL weakness. In terms of US developments, Tuesday’s retail sales are the only data point of note. The control group measure, which is a direct input into GDP accounts, is expected to land at 0.4% MoM. Any deviation to the downside is likely to fuel concerns of a US recession, lifting the dollar as a result.

EUR

French bonds (OATs) remain under pressure this morning as polls over the weekend showed Marine Le Pen’s National Rally party maintaining a substantial lead. Meanwhile, on the other side of the spectrum, left-leaning parties have joined to create the New Popular Front, a move which has only increased the likelihood Macron’s centrist alliance failing to reach the run-off election on July 7th, leading to cohabitation come July. While this uncertainty has largely played out through the bond market, where the spread in French-German 10-year yields trades just shy of its 2017 high this morning, it is starting to have an impact in FX markets, with the single currency closing a third of a percent lower on Friday to finish almost a full percent down on the week. Moreover, traders are beginning to price in a greater risk of more pronounced EURUSD weakness in the options space, where the price of 1-month puts over calls is at its highest since October 2023 when markets were fretting over further Fed hikes and a eurozone recession. In terms of data, the calendar is light this week ahead of Friday’s flash PMIs, keeping all of the focus firmly on the political circus in Paris.

GBP

Despite the UK being set to receive not one, but two big events this week, we suspect that the impact of both on sterling is likely to be relatively muted. First, CPI on Wednesday should show that headline inflation eased to 2.0% YoY. But the services inflation measure closely watched by the BoE is almost certain to have remained above Bank staff forecasts of 5.3% in May, an outcome that should do little to shift short term rate cut expectations. The BoE’s June policy decision on Thursday is the other major UK event of the week, though this too should have minimal impact. No change in rates is expected, and a run-back of the May messaging looks likely, keeping the door open to an August rate cut, but not pre-committing to any future decision. If we are right, then the roughly 50% chance of an August cut implied by swap markets looks fairly priced for now, meaning that neither event is likely to shift the market implied easing path in the UK, and therefore offer much impetus for sterling this week. That said, the pound has started the week on the back foot as data from Rightmove showed that UK house prices flatlined in June. But in our view this is more likely a product of reports over the weekend suggesting the Conservatives could be on track to win fewer than 100 seats in Parliament, with this likely to continue as the major story for sterling this week. As we have noted previously, a Conservative wipeout is unlikely to be a sterling positive event given that it cripples any political opposition and scrutiny. Given this, while we have been inclined to view the prospect of a large stable Labour majority as sterling positive heading towards July 4th, if polls continue to suggest this could turn into an extinction event, then this suggests building risk that the pound retraces lower in  the coming days.

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