News & analysis


G10 FX markets traded on a quieter note yesterday, even as French-German yield spreads briefly broke above 80 basis points and the S&P 500 hit fresh record highs. For reference, EURNZD was the most volatile cross in yesterday’s session and still traded within a 1% daily range. What volatility there was largely came in the overnight session in G10 markets, where mixed Chinese data split markets. Weak industrial production and property related data saw commodity and regional currencies underperform, while an improved consumption outlook helped economies like the eurozone where China’s consumer provides a large export market. The consumption-production divergence in FX markets was more stark in the emerging market space, however, where local factors also played a role. Out of favour LatAm currencies continued to trade at the bottom of the expanded majors, led by the Brazilian real which fell 0.8% to hit a fresh year-to-date low. While the Chinese data weighed on the real by dampening the outlook for Brazil’s trade balance, investors are also voting on the government’s failed ability to get the nation’s finances in check with their feet. As we noted in our week ahead, we favour upside USDBRL protection in the options space, where implied volatility is at historically low levels despite the move in spot, given the BCB is set to announce policy this week, which could thrust them into the government’s crosshairs. At the other end of the spectrum were CEMEA currencies, where PLN, HUF and ZAR all recorded gains in excess of 0.7% on the day as the indigestion caused by European political risk seemingly topped out, while local factors also cut in a supportive direction. In Poland, core inflation eased slightly more than expected, providing PLN support through higher real rates, while in Hungary, the National Bank of Hungary is seen potentially ending its easing cycle today, which against a backdrop of continued DM easing should prove supportive of a currency that was once placed on a pedestal by markets due to its level of carry.

While European and Asian equities catch a bid this morning following the constructive session in the US yesterday, the dollar remains broadly in favour this morning, with just AUD notching gains in the G10 after the RBA met our expectations, maintaining its Cash Rate at 4.35% and keeping its open-ended forward guidance unchanged despite the slowing growth data. That said, price action is relatively muted, with AUDNZD the largest mover at 0.44%. US retail sales data later today should provide a bit more volatility in G10 FX markets. Emphasis will be on the control group measure, which is a direct input into GDP and is expected to more than reverse April’s -0.3% decline with growth of 0.5%. The data over the Easter period should be viewed in combination due to seasonal factors, and as such an on-expectations print is unlikely to jolt concerns of inflation persistence but instead negate some concerns that the recent decline in inflation pressures didn’t emanate from a substantial slowdown in growth. That said, the data remains volatile, and any deviation from consensus is likely to drive another wave of defensive dollar positioning.


Having broken 80 basis points intraday, the spread between French and German 10-year yields began to compress yesterday, with the move continuing in early European trading this morning. The abatement in French risk premia had spillover effects into the currency market, with the euro catching a bid and rallying 0.3% against the dollar yesterday. Supporting the moves in markets was an IFOP poll, which showed Marine Le Pen’s party dropping 2pp to 33%, with the Left Wing Alliance, announced late last week, taking the market share to rise to 28%. While this still leaves cohabitation as the likeliest outcome from the elections, it reduces the risk of National Rally taking a decisive victory as was initially feared following the European election outcome. ECB speakers also helped calm fears, with most outlining that the developments in the bond market aren’t yet causing concern, although President Lagarde did say policymakers were “attentive” to the moves. Chief Economist Philip Lane was more dismissive of the moves in markets, and instead focused on economic fundamentals, which in his view made a July cut unlikely.

While French politics is likely to continue to keep EURUSD trading cheap relative to its fundamentals and downside hedging activity high in the options space, we suspect the peak of its impact has likely passed barring any significantly disruptive policy pledges, such as Frexit, get announced by leading parties. This should see the currency markets return to trading the economic data, which today is released in the form of ZEW survey results and US retail sales. We suspect the latter will have the more influential role to play today, with an on-consensus reading likely to extend the euro’s recovery, as long as bond spreads remain below yesterday’s highs.


Even with a double header of May CPI data and a BoE meeting coming up this week, sterling price action remained relatively muted on Monday. GBPUSD rose 0.15% to start the week, while GBPEUR eased by one tenth, leaving the pound middle of the pack for G10 FX returns versus the greenback. We are inclined to think this reflects traders’ sanguine perspective on the week’s coming events, and in particular tomorrow’s CPI data released at 07:00 BST. Headline price growth will fall to 2.0% YoY, matching the BoE’s inflation target for the first time since July 2021. But barring a major surprise, services inflation will remain tracking above the BoE’s 5.3% forecast, with markets looking for a 5.5% print. All told, that sets up Thursday’s BoE meeting to be a non-event too. It is hard to envisage a scenario where the MPC cuts rates with underlying inflation looking stickier than expected, and when the Bank has no ability to communicate with markets due to election restrictions. Perhaps more interestingly, this does leave the door open for some notable volatility after election day. Not only will markets have to contend with the fallout from the election, but also the re-start of BoE communications. We think markets are underpricing the risk of an August cut at just shy of 50%, with just 1.7 rate cuts priced for 2024 as a whole, not least given indications from BoE speakers prior to the Purdah period that there is an increasing willingness to look through temporary resilience in the data. If we are right, then the MPC is likely to surprise markets with guidance that is more dovish than expected, with the pound likely to see a notable uptick in volatility in early-mid July as markets re-evaluate their easing expectations.


USDCAD was left adrift to start the week, with no top-tier data emanating from North America to offer direction for the pair. Today though, May US retail sales data is likely to be in focus for loonie traders. Markets expect to see a modest rebound after a weak set of April figures, but as we see it, a miss to either side is likely to see a further buildup in defensive dollar positioning. Given this, while there is a path for USDCAD to slide into tomorrow’s publication of the BoC’s summary of deliberations, we think it is narrow. Instead, we expect a degree of caution over building up USDCAD positioning today, especially given risks surrounding the BoC’s guidance tomorrow. Other early easing G10 central banks such as the ECB or the Riksbank have explicitly taken the prospect of back-to-back rate cuts off the table. The BoC in contrast, has deliberately kept that door open, offering no firm steer on their likely easing path. For now this leaves markets projecting a two-in-three chance of a July rate cut from the BoC. While we suspect that the Governing Council will do little to upset this, any clarity on the likely short term path for Canadian rates could therefore see a sharp move in market expectations for BoC easing, raising the risks of a sharp move in USDCAD tomorrow, which should keep traders relatively cautious, regardless of how today’s data prints.



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