USD
The dollar spent the majority of yesterday’s session extending its two-day drift lower, sustaining losses primarily against higher beta currencies. However, this soon came to a sudden halt midway through the afternoon session as hawkish comments by Minneapolis Fed President Neel Kashkari coincided with two weak bond auctions and a strong beat in May’s consumer confidence to push yields higher across the curve. While yields have been retracing higher since the middle of the month without the usual bout of associated dollar strength,it was the 7 basis point jump in the 10-year that halted this trend as it drove overall rates volatility higher. This put an abrupt end to the six-week downtrend in the MOVE index, which ultimately soured risk sentiment across asset classes, that until that point had sustained the pressure from the retracement in yields due to associated reduction in volatility.
That said, the moves across most major currency pairs were limited, as we had anticipated. Upon the daily close, the whole G10 currency board finished within a 0.66% range, and the overnight session has remained fairly quiet once again. The major moves instead continue to stem from the bond market, where Japanese yields have risen to their highest since 2011 and Australian yields have gapped over 10 basis points higher across the curve as headline inflation in April defied expectations and actually rose 0.1pp to 3.6% YoY. While we have long argued that the RBA and the RBNZ will be some of the last G10 central banks to cut rates due to structural supply constraints, we don’t expect this to be supportive for their currencies until the cross-asset environment becomes more supportive. This has been on clear display today where the move higher in Aussie yields hasn’t driven a significant response in AUD, primarily due to the continued slide in the Chinese yuan and the signal that sends over regional growth prospects.
Looking ahead to today, today’s US data calendar is sparse. The main points of note are another two Treasury bond auctions ($60bn of T-bills at 16:30 BST and $44bn of 7-year notes at 18:00 BST), NY Fed President John Williams speaking at 18:45 BST, and the Fed’s Beige book released at 19:00 BST. We doubt either will cause significant market gyrations, with the focus instead squarely on the bond market, which should act as a continued headwind to the risk rally.
EUR
Despite initially climbing through Tuesday morning, EURUSD ultimately closed out yesterday flat, with little data of note on either side of the Atlantic to offer significant impetusin advance of this week’s eurozone inflation prints. This morning, however, German inflation is likely to garner some attention from markets, not least given thatthe overshoot in Q1 negotiated wages was entirely attributable to higher-than-expected German pay settlements. As we noted last week, the rise in negotiated wage data from 4.5% in Q4 to 4.7% in Q1 was almost entirelythe result of one-off payments to German employees in March. Any signs that thisadditional firepower istranslating into inflation pressures would naturally be a worry for ECB policymakers. That said, we doubt that it will, due both to the one-off nature of the payments, and the fact that there has beenlittle indication of any passthrough from the timelier May PMI readings. Even so, the ECB willstillbe looking for this confirmation later today.If received, this isunlikely to change short term market expectations for the ECB,implying an immediate reaction from the euro that is relatively muted once again. But crucially, a moderate reading would keeppolicymakers focused on a debate between 3 and 4 rate cuts this year, which should act as a drag on the euro over the medium term.
GBP
Tuesday saw another quiet day of sterling price action as the general election campaign dominated headlines once again.With opinion polling suggesting little shift in voting intentions so far, news from the campaign trail holds little impact for markets at present. That said, there was arguably one notable development, with Labour’s Shadow Chancellor Rachel Reeves ruling out any surprise rise in taxes. Even so, this is likely to be a longer run story for markets given the fiscal constraints this would impose on any future Labour government, rather than an immediately market moving announcement. All told, with a blank data calendar until Friday and no Bank of England speakers scheduled through the election period, we expect the next few days will see yet more muted GBP trading.
CAD
Though not quite enough to reverse Monday’s selloff, USDCAD posted a modest bounce yesterday, defying cross asset dynamics that would ordinarily be loonie supportive. Granted, equities flatlined, butthe 2% rally in oil prices should have offered some upside for the Canadian dollar. Similarly, the limited domestic data released yesterday also pointed to some loonie upside at the margin. Raw materials prices rose 5.5% MoM in April, up from 4.7% in March and well above market consensus that had expected a fall to 3.0%. Producer prices meanwhile rose 1.5% in April, again exceeding the 0.9% increase that economists had anticipated. While in isolation this could point to building inflationary pressures, we think the lack of market reaction makes sense on this occasion. Not only is the reading volatile, but with a weak domestic economy the ability of firms to pass on increased costs to consumers is limited.This is likely the overriding factor for loonie traders this week, heading towards the release of Q1 GDP figures on Friday. With these prints set to confirm that Canadian economic struggles continue, and the output gap remains negative weighing on inflation, we expect this prospect is likely to continue posing a headwind to the loonie over the coming days.
