News & analysis


Our primary view over the past six weeks has been that it is too soon to turn bearish on the dollar, even as US inflation pressures cooled and ushered in up to two rate cuts from the Fed this year. While the dollar has failed to return to pre-FOMC levels over this period, it has completely retraced its data-induced decline to trade just 0.7% below this year-to-date high. As we had warned at the time, the path lower for the dollar remained too narrow to give us confidence. With the dollar’s safe haven channel wide open and markets having turned too negative on the US economic data, meaning positive overshoots were likely, we expected both sides of the dollar smile to contribute to the dollar’s ascent. That has broadly played out. Rising election risk in both emerging and developed markets have prompted defensive positioning in the greenback, while simultaneously the US surprise index has begun to bottom out, driven by Friday’s substantial overshoot in June’s flash PMIs. While the dollar has overshot the move in rates, we still think it remains premature to bet against the greenback. Granted, there is little data of note out of the US this week beyond Friday’s PCE report, but the first US Presidential debate on Thursday should limit any USD losses derived from calmer cross-asset conditions. The market consensus looks for both candidates to talk hawkish on China and fiscal policy, while also testing each others cognitive competency. If the debate meets expectations, the outcome should keep markets firmly focused on more inflationary US policy and relatively higher intermediate yields, which will prove dollar supportive. Caution around this and the implications for Fed policy may be stressed today Fed members Kashkari and Barkin, although we suspect a similar message will be centred on the mixed US data as opposed to the political backdrop.


The Japanese yen fell another half a percent on Friday as May’s inflation data moderately undershot expectations, leaving the yen at the mercy of the rally in US yields following the stronger flash June services PMI. Trading just shy of the 160 handle, the yen is drawing a lot of attention this morning as markets return to intervention watch in Japan. Overnight, Japan’s top FX official at the Ministry of Finance, Masato Kanda, hit the wires to stress that authorities remain on alert to intervene at any point in time. However, the limited impact of his rhetoric and the BoJ’s record yen purchases in late-April/ early-May leave us to believe that authorities are more concerned about the pace of the yen’s decline as opposed to outright levels, meaning markets may be able to break the 160 handle in a sustained fashion as long as the move isn’t disorderly and self-sustaining.


The single currency closed back below the 1.07 handle last week as the double-whammy of a dovish SNB on Thursday and a negative surprise in June’s flash PMIs on Friday saw it decline half a percent toward the end of the week. While we had long warned that the risk of a cut from the SNB made short EURCHF positions less attractive than outright short positions in EURUSD when it came to hedging French election risk, Friday’s PMI results came as a shock. Snapping a five-month trend of improvement, firms across Europe’s major economies and industries not only reported weaker growth conditions, but those in France already stressed caution due to the upcoming election. The disruption in the European growth outlook led our fundamental EURUSD model to decline a percent, suggesting markets now price less risk premia in spot EURUSD than previously. With this coinciding with a further widening in OAT-Bund spreads, we suspect the euro will remain under pressure this week as traders embed greater risk premia into the main currency pair heading into the first round of voting on Sunday.


The pound struggled for direction into the back end of last week, with a combination of May retail sales data and June’s flash PMIs offering mixed signals for sterling traders. The first of these showed a sharp 2.9% MoM rebound in consumer activity after a very soft April print, suggesting that Q2 growth numbers are likely to continue the trend seen in Q1 and deliver another strong economic expansion. Friday’s PMI numbers, however, were disappointing, with services activity slowing notably. Having been expected to post a marginal increase from 52.9 to 53.0 by markets, the services reading actually dropped to 51.2. Granted, this still indicates an expansion in activity in June. But it also suggests that growth momentum may be slowing in the second half of the year. For now, we are a little cautious of reading too much into a single flash print, not least given the distorting impacts of an election campaign amongst other factors, but a repeat reading in July would certainly be cause for concern. For this week however, traders only have a handful of second tier data releases to contend with from the UK, none of which are likely to be significantly market moving. Instead, we expect that the general election campaign is likely to remain front and centre as the poll date on July 4th draws closer, a dynamic that should continue to support modest sterling upside on the prospect of a moderate Labour government that looks set to secure a stable majority, and is likely deliver some modest growth-boosting reforms.


The back end of last week offered only muted USDCAD price action, despite a better-than-expected April retail sales report that offered a counterpoint to the narrative of weak Canadian growth. Specifically, the retail sales ex-auto measure rose by 1.8% MoM, notably better than anticipated by traders. While this does hint at the prospect of Canadian growth beginning to improve at the margin, traders’ reluctance to take CAD higher makes sense to us, with two key loonie risks events coming up this week. First, tomorrow’s May CPI report should show further disinflation progress across all key measures of price growth watched by the BoC. Most importantly, core median inflation is expected to remain at 2.6% YoY, while core trim inflation is expected to soften 0.1pp to 2.8%, keeping both of the BoC’s preferred measure of underlying price growth within the Bank’s tolerance band. This is set to be followed by April GDP data on Friday, which is expected to show a 0.3% MoM expansion in activity. Against population growth of 3-4% per year, this should mean that the output gap failed to close in May and as such will continue weighing on inflation in the coming months. If realised, this backdrop should offer further confirmation that Canadian inflation will continue to ease slowly back to target, keeping the Governing Council on track to cut rates once again next month, triggering a further acceleration in BoC easing bets that could weigh on the loonie this week.



This information has been prepared by Monex Europe Holdings Limited, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.