News & analysis


Having sold off following a soft ISM manufacturing report on Monday, the dollar DXY index found support at the 104 level yesterday even as JOLTS job openings data for April significantly undershot expectations. Printing at 8.06m, just under half a million positions have now been taken off the market, leaving the number of open positions at a 3-year low. The speed of the decline in openings triggered one of the largest rallies in global bonds this year, which alongside increased volatility in emerging market FX following historic election outcomes from South Africa, India and Mexico, fuelled a modest USD rally even as yield spreads contracted against the dollar. This is befitting with our central view that the path for the US data to traverse in order for the dollar to continue weakening is relative narrow, with significant undershoots likely to trigger more defensive positioning in the greenback as hard landing fears rise like yesterday. Moreover, the dollar should also find support from rising election risk, especially as the US Presidential election cycle begins to ramp up.

With the US data coming in soft so far this week, the ISM services report will be in increasing scope this afternoon at 15:00 BST. Having fallen into contraction back in April due primarily to weaker employment conditions, expectations are for a modest rebound from 49.4 to 51.0 driven in large part by a recovery in the employment sub-index from 45.9 to 47.2. Any signs of further weakness, however, will likely drive another rally in Treasuries, leaving yields to drop below their multi-month range. As yesterday proved, however, the readthrough to the dollar is dependent on the size of the negative surprise in the data and how broader external conditions evolve. While the dust seems to be settling in emerging markets, the focus will shift to the Bank of Canada today, where we expect policymakers to cut rates. While this is broadly expected by economists, there is some hesitation by markets to fully price this in given the Bank’s proclivity to move the goalposts at the last minute.  Thus, a rate cut in Canada, especially if delivered with dovish forward guidance, could be enough to trigger another large DM bond rally alongside the ISM services figures that the dollar outperforms once again later today. As laid out yesterday in our June forecasts, we think it remains too soon to turn structurally bearish on the dollar.


The single currency failed to make gains on the drop in US yields yesterday as cross-asset conditions left traders hesitant to adding more risk to their portfolios. With the single currency already trading rich at around the 1.09 level, this saw some modest EUR length get trimmed yesterday. Today’s price action will likely be a repeat of yesterday in the sense that external conditions will be in the driving seat, with local factors on hold until the ECB decision tomorrow afternoon. Here, we expect the central bank to conduct a hawkish cut. While this wouldn’t be detrimental to the single currency given how telegraphed a rate cut has been, we think it will keep a firm ceiling on EURUSD’s range at 1.10 for the coming months.


Sterling eased three tenths against the dollar and one tenth against the euro on Tuesday, with muted price action once again the name of the game for sterling traders. All told we see little reason for this to change today. Final May PMI readings are the only notable release scheduled, and these are unlikely to hold too many surprises for traders, having already seen the flash readings almost a fortnight ago. Nor is the election campaign appearing to have much of an impact on the pound. Despite a leaders debate yesterday evening; no candidate delivered a knockout blow, leaving minimal impact on markets this morning.


Decision day is here for the Bank of Canada. That said, we don’t think it should be all that difficult a choice given the slowdown in data seen since the April policy meeting. Growth remains weak at just 1.7% QoQ annualised in Q1, below the Bank’s 2.5% estimate of potential, meaning that an output gap that was already negative, has continued to grow. Meanwhile, all major inflation measures have cooled sufficiently to lie within the Bank’s tolerance band. Headline CPI growth was recorded at 2.7% YoY in April, while the Bank’s preferred core-median and core-trim measures of underlying inflation sat at 2.6% and 2.9% for the same month. As we see it, this meets the conditions Governor Macklem set out in April to start cutting rates. Namely, all that was needed to begin easing policy, was for the Bank to see further disinflation progress. With this in the bag, we see little reason that the Governing Council should not cut rates by 25bps this afternoon. Admittedly, traders are not unanimous in this view, and swap markets currently see the odds of rate cut today at just north of 80%. While we think it should be a done deal, but we can understand the hesitancy. The Governing Council has form for moving the goalposts between meetings, and they could point to April’s rebound in labour market as a reason for caution. Even so, the fact that there is still some doubt leaves scope for CAD downside today, with USDCAD trading through 1.37 likely in range if our expectations are met. Instead, the key risk for loonie traders in our view is the Bank’s guidance for rate cuts in the second half of the year. We think the disinflation progress to date warrants the BoC front running the Fed by some distance. If it appears that this view is shared at the BoC, this could turn some modest CAD downside into a sharp loonie selloff later today.



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