CAD
After a busy week just gone, loonie traders look set for a quieter data calendar coming up, with no major data prints scheduled out of Canada for this week. Even so, we are still inclined to think that risks to the loonie look skewed to the downside. Friday’s jobs report was unambiguously soft, with 1.4k jobs lost in June, while the unemployment rate climbed by more than expected to hit 6.4%, up from 6.2% in May. The only counterpoint to the narrative of a softening labour market was a surprise rise in average wage growth which printed at 5.4% last month, up from 5.1%. Even so, composition and base effects mean that this is not quite the signal of resilience that it might appear at first glance. With all this in mind, the odds of a July rate cut, which markets currently see at 60%, look too low to us. As we see it, all that is needed for the BoC to cut rates at their meeting later this month is a soft CPI print on July 16th, an outcome that should be released if price growth continues to print in line with other economic indicators. In the interim, however, acknowledgement from the Fed that the data is moving in the right direction for a September cut may also endorse our dovish BoC view, given that short-term rates traders have been hesitant to price a significantly diverging path for the Fed and BoC. As such, further CAD weakness may be in store this week, especially on crosses such as AUDCAD and GBPCAD.
USD
The dollar closed the past week 0.75% lower as a combination of a more optimistic Powell and a moderate softening in the US labour market helped lift expectations that the Fed would cut rates twice this year, in September and December as per our base case. Whether or not that continues to be the case moving forward will be determined by another round of Fedspeak, primarily focused on Powell’s semiannual testimony to lawmakers on Tuesday and Wednesday, ahead of June’s inflation report on Thursday.
We expect Powell to repeat his cautiously optimistic message from Sintra in front of House and Senate representatives this week. Whether or not this continues to weigh on yields will be determined by how much Powell leans on the evidence from last week’s labour market data, the only new piece of economic data published since he last took to the wires. As we noted last week, the payrolls report struck the perfect temperature for markets to add to Fed easing bets, with private payrolls only moderately underperforming and a sizable -111k net revision to the hot reports in the two prior months. Should Powell draw further confidence from the data, his comments will likely weigh further on yields and the dollar. Shortly after Powell’s testimonies in Washington, focus will turn to June’s core CPI data. More specifically, the core services figure. Last month this effectively stalled, raising confidence that the Fed will be able to cut rates at the end of the third quarter. At the time, we chalked much of this down to highly volatile components and transitory factors. The extent to which the core number rebounds will therefore be key for the prospect of a September rate cut. Consensus looks for core inflation to print at 0.2% MoM, which if realised should endorse the market-implied path for the Fed and keep the dollar under pressure.
EUR
The second round of the French election produced quite the shock yesterday evening when the Ipsos exit poll showed Marine Le Pen’s party wasn’t only set to undershoot the number of seats required for an outright majority in the National Assembly, but was in fact destined to be only the third largest party. This is a stark turnaround from the first round election, where National Rally (NR) won the most seats outright and was on track to be the largest party in the legislature. According to the Ipsos poll, the alliance between the centre-left to far-left New Popular Front (NFP) coalition and Macron’s centrist Ensemble coalition, formed to prevent the rise of the far-right, proved effective, with both parties taking the largest number of projected seats at 171-187 and 152-163 respectively. While this has negated the risk of a far-right majority within the National Assembly, it has yielded a hung parliament with no party close to the 289 seats required to command a majority. The question now for investors is how such a split National Assembly moves forward. The most touted outcome is a grand coalition spanning the centre-left and centre-right, potentially led by NFP architect and centre-left candidate Glucksmann. While theoretically feasible if the exit polls prove correct, the lack of commonalities across manifestos would make governability difficult and political gridlock likely. While French politicians work out the details of such an agreement, President Macron will likely refuse Prime Minister Attal’s letter of resignation today, leaving him to lead a caretaker government while an effective coalition is formed. With a budget not due until the Autumn and continuity likely to remain in France under Attal and Macron over the coming weeks, if not months, the market response to the news has been fairly relaxed. Bond spreads have marginally widened, French stock futures trade half a percent lower heading into the open, and EURUSD trades a tenth of a percent lower having dropped half a percent at the New Zealand open Sunday evening. This is a negligible response to what was a substantial risk event in Europe in recent weeks.
As leaders of France’s main parties attempt to form a new government, the market focus is likely to return to economic fundamentals. For EURUSD, this will largely take aim at US developments, namely Fed Chair Powell’s semiannual testimony on Tuesday and Wednesday ahead of June’s CPI report on Thursday. Last week, Chair Powell struck a more optimistic tone on the Fed’s inflation battle at Sintra, which alongside a marginal easing in the labour market on Friday helped lift expectations of a rate cut in September. A reiteration of this stance will likely continue weighing on the dollar into Thursday’s inflation report where all eyes will be on core services CPI. Another weak reading should keep Fed expectations on the more dovish end of the spectrum, providing EURUSD with support to trade above the 1.08 handle despite the political noise.
GBP
The impact of the French election was not just limited to the euro overnight, with sterling also starting the week on the back foot against the dollar as the surprise result had spillovers for other European currencies. Even so, this retreat belies domestic developments this morning, with the REC report on jobs offering a mixed readthrough on the state of the UK Labour market. Granted, permanent hires fell once again in June. But permanent staff salaries increased at the fastest pace since October 2023, raising the prospect that resilient underlying wage growth remains a potential source of inflationary pressure for the UK economy. While wage growth has not seen the same emphasis from recent BoE communications as it did at the start of the year, this is still a move in the wrong direction for the MPC if they are looking to cut rates in August. This last point is likely to be key for how sterling trades this week, with the BoE’s blackout period coming to an end following the UK election. First up from the MPC is external member Jonathan Haskel, speaking at 17:15 BST today. Given that Haskel has typically voted with the majority throughout his tenure, he should be a good indication on the central thinking among MPC members and how they have viewed the data over recent weeks. We are inclined to think he will skew dovish based on the tone of the June policy statement and minutes, where the MPC showed a willingness to look through recent signs of labour market resilience. But having not heard from monetary policymakers over the election campaign, risks are that markets are caught off guard, which could see the pound continuing to trade under pressure if we are right.
This content was originally published by our partners at Monex Canada.