CAD
While today’s PMI numbers should add further confirmation that the Canadian economy remains weak, it is tomorrow’s jobs report that is key for the Bank of Canada. Admittedly, markets do expect to see a modest uptick in wage growth. But this is likely to be outweighed by softer details elsewhere in tomorrow’s report. Consensus expectations project just 25.0k jobs added in June, marginally down on the already weak 26.7k reading seen previously. Add to that an expected rise in the unemployment rate from 6.2% to 6.3%, we think this should give the BoC the evidence they need to cut rates this month. All told then, barring a surprise in the counterpart US release on Friday that triggers a significant reassessment of Fed easing expectations, we expect to see market implied odds of a July rate cut from the BoC tracking above 50% to end the week, an outcome that should see the loonie softening into the weekend.
USD
While today should be a quiet day for dollar with the US celebrating Independence Day, yesterday saw some notable moves in the greenback, fuelled by a weak set of ISM services PMIs and speculation around Joe Biden’s future in the US Presidential race. Turning to the ISM numbers first, the service index dropped by 5.0 points in June, landing well below expectations. In fact, the headline reading of 48.8 is the lowest recorded since early 2020 at the start of the coronavirus pandemic, while the composition of the report was also weak, with both new orders and employment decreasing notably. The knee jerk reaction of traders was to trim long dollar positions in response, with the DXY index sliding 0.6% immediately following the release.
However, as we noted recently in our July forecasts, the path lower for the dollar remains narrow, with both side of the dollar smile offering a route to greenback upside. Specifically, we think traders will struggle to differentiate between signals that the US economy is slowing to a soft landing or dropping into recession. Yesterday’s PMI data was a prime example. While the PMI landed below 50 to signify a contraction, the report as a whole read like a slowdown in growth. As such, it was unsurprising to us to see much of the dollar’s initial selloff reverse. While yesterday’s data clearly pointed to a softening US growth outlook, risks of a more sinister downturn triggering a haven bid should prevent markets from becoming too structurally bearish on the dollar.
We think that there was a second factor behind the softer dollar yesterday afternoon. Rumours that Biden was considering withdrawing from Presidential race saw Kamala Harris briefly overtake Joe Biden as the most likely democratic candidate for President in betting markets. Given our view that a Trump victory is the most dollar positive outcome of the election, with this in turn more likely in the event of a faceoff with Biden, we are also inclined to think that yesterday’s speculation also weighed on the dollar at the margin initially, before subsequent pushback from the Biden campaign helped spur a recovery for the greenback.
EUR
The single currency pounced on the wave of dollar weakness following the US ISM services PMI data yesterday, driving briefly back above the 1.08 handle following the release. Ongoing concerns about the second round of the French election soon began to weigh heavy, however, prompting a partial reversal, leaving EURUSD to close only a third of a percent higher on the day and down ever so slightly against the pound. We suspect this will be a common theme throughout the week, with traders hesitant to engage in fresh EURUSD long positions heading into this weekend’s second round vote, even if Friday’s payrolls data hits the right note for a sustained risk rally.
Even though the spread between French and German yields narrowed slightly yesterday on the news that over 200 centre and left-wing candidates dropped out of their respective second round races to not split the vote against the far-right National Rally, this too had a limited impact on EURUSD. This is reflective on the partial drag that the widening had on the currency market to begin with, alongside risks that a hung parliament or an eventual majority for the far-right would lead to spreads re-widening in due course.
Ahead of Friday’s US data and the weekend’s second round election, the focus for markets is likely to rest on euro-crosses. Of note is EURCHF, which is trading up two tenths of a percent this morning as Swiss inflation data once again undershot the SNB’s projections. With the negative surprise motivated by weaker imported and goods inflation, the SNB’s decision to cut rates in order to weaken the franc has been validated. With domestically produced inflation pressures still strong, however, we doubt the SNB will be as willing to cut rates further, increasing the focus on the Swiss franc as the marginal policy tool. On our estimate, any break below 0.98 on the cross is likely to spark concerns over SNB intervention as a result, confirming our view that short positions in the cross are no longer the best European hedge at present.
GBP
While Brits are busy heading to the polls today, traders will be still be keeping an eye out for the June edition of the Bank of England’s Decision Maker Panel before the first exits are released at 22:00BST. All told, the DMP is expected to show that inflation expectations continued to decline, with one year ahead CPI expectations projected to cool from 2.9% to 2.8%. If realised, this should do little to disrupt BoE easing expectations, keeping the MPC on track to start cutting rates in August. As such, sterling price action should remain relatively muted ahead of the election results, with these set to dribble in later this evening and into the early hours of tomorrow morning.
This content was originally published by our partners at Monex Canada.