CAD
Looking back over the week so far, USDCAD price action has failed to tell the story of the key events in Canada. Most significantly, despite a hotter than expected CPI reading on Tuesday taking a notable chunk out of short run BoC easing expectations, the loonie still drifted lower through yesterday’s trading. Given this, we are inclined to expect a similar dynamic today, meaning that although markets are due to receive June’s CFIB business barometer and April SEPH employments data, these are likely to have only minimal impact on USDCAD. Instead, today the focus is likely to be on the US with the dollar continuing to dictate the direction for the pair, and where a third reading for Q1 GDP is scheduled to be published alongside initial claims data, inventories, and goods orders. That said, we still think events in Canada are worth keeping an eye on, even if they aren’t immediately market moving. All told, we expect the data today, alongside Friday’s GDP reading, to paint a soft economic picture. If we are right, this could well leave markets underpricing the likelihood of the BoC cutting in July, risking a sharp break higher for USDCAD when the Governing Council delivers their decision next month.
USD
FX markets remained defensive yesterday, with the dollar DXY index climbing a third of a percent to cross the 106 handle for the first time since the Fed’s latest decision in early May. The moves were fuelled by a rally in core yields, triggered by the overshoot in Australian inflation data early that morning. This in turn led USDJPY to cross the 160 handle despite repeated verbal intervention by top currency officials in Tokyo, leaving the yen at its weakest level since 1986. Outside of that, there was little in the form of bullish catalysts for the dollar yesterday, leaving many with questions as to why the dollar’s rally was so substantive given the developments were only peripheral. As we noted earlier this week, our bias was for the dollar to become progressively bid throughout the week as traders took defensive positions in the dollar heading into the first US presidential debate this evening and the first round of the French election this weekend. This was most visible across high beta FX yesterday, with much of the EM complex coming back under substantive dollar pressure yesterday, led by MXN which sank 1.3% on the day. While uncertainty around tonight’s Banxico decision may have played a role in the peso’s underperformance, we believe concerns around the US election in November was likely the main determinant given the risks are already becoming embedded in Mexican markets. The main risk posed by the election is the 2026 review of USMCA, which we suspect Trump could utilise to gain immigration concessions out of Mexico. This was thrust back into the limelight yesterday as incoming Economy Minister Marcelo Ebrard stated that Mexico should seek to strengthen labour mobility in the review stages. With trade protectionism and migration likely to be a main factor in tonight’s presidential debate, and Mexico seeking greater alignment with the US, it was unsurprising to see traders pull out of long MXN positions yesterday, especially given the tail risk of a Banxico cut.
JPY
The Japanese yen traded through the 160 handle yesterday for the first time since 1986, leaving many questioning when Japanese officials will step back into the market to support the ailing yen. In our view, this is unlikely until the 163-165 region, with the actual level of intervention dependent on how fast the yen reaches these levels. Our view is twofold. First, the spread between spot USDJPY and fair value is only 3 points at present. This is half the spread that was seen in late April when the BoJ last intervened. Second, realised volatility in the yen remains low, meaning officials are unlikely to as concerned about the breakout as they were almost two months ago. That said, the Ministry of Finance’s opaque reaction function does warrant caution in these unchartered waters, which should leave any subsequent yen weakness as limited and thus unlikely to prompt any intervention. On the contrary, any sharp move higher in USDJPY will only increase the probability of BoJ intervention, making 163 more likely the line in the sand than 165.
EUR
Having toyed with breaking the 1.07 handle for much of the past week, the defensive price action in FX markets yesterday saw the single currency drop and consolidate below the psychological level. We expect sentiment to remain bearish around the euro heading into the first round of the French elections this weekend on fears that National Rally’s support may be significant enough to generate an outright majority in the National Assembly; an outcome that would not only increase concerns over fiscal slippage in France, but also EU-wide tensions. Before Sunday’s vote, however, the upcoming presidential debate in the US and Friday’s PCE data will need to be navigated. The former is likely to have a larger market impact in our view, especially if the debate centres around trade protectionism. Any jibes at the EU along with China will likely add to the euro’s woes.
GBP
Sterling was not immune to the dollar wave that swept through FX markets yesterday, sliding 0.5% against the greenback by the end of the session. All told, this left sterling middle of the pack amongst G10 currencies, an outcome that reflected the current lack of drivers for the pound. Granted, on the data front CBI sales readings did undershoot expectations on Wednesday morning in what might be another warning sign that economic momentum is slowing into mid-year. But traders were once again inclined to look through this for the time being, not least given the measure’s significant volatility. Politics too had little impact for markets yesterday. Although last night played host to the final leaders debate of the general election campaign, neither Keir Starmer nor Rishi Sunak appeared to do enough to shift the needle based on initial reactions. With this in mind, and a quiet data calendar coming up over the next week, traders will now be waiting impatiently for the election on July 4th as the next potential catalyst for sterling. Until then, the pound is likely to continue struggling for direction.
This content was originally published by our partners at Monex Canada.