News & analysis

A relatively light calendar this week saw inflation dynamics in focus across G10 FX, with the most notable releases coming in Europe and in North America. For the former, inflation prints in both the Eurozone and Switzerland showed price growth slowing faster than expected. While the softening in eurozone inflation had already been inferred from national readings, the drop in Switzerland caught markets off guard, leading EURCHF to stage a notable rally as a consequence. In fact, the only G10 currency that underperformed the franc this week was the Canadian dollar, which dropped 0.6% against the greenback this week, driven by Friday’s jobs data. Whilst the US economy added 303k jobs in March to add credence to the Fed’s call for caution, Canada actually shed -2.2k jobs. This adds further weight to our longstanding thesis that a divergence in economic conditions is set to play out between Canada and the US, with this in turn likely to see the Bank of Canada easing policy much faster than the Fed. Next week, we will get to see if the BoC’s Governing Council now agrees with our view. We think they will tilt dovish and steer towards commencing rate cuts in June, an outcome that should see USDCAD taking another leg higher next week. Similarly, the ECB should also discuss easing in June. But with this having already been widely communicated to markets, attention will rest on the pace of subsequent easing. We doubt President Lagarde will shift aggressively next week, although risks are definitely tilted towards a more dovish tone than markets are currently factoring. With US CPI set to land just before both ECB and BoC meetings, we expect this to keep rate divergence centre stage for markets, unlocking another leg higher in the dollar. Finally, rounding off the week is the Monetary Authority of Singapore who we suspect will keep their policy setting untouched, favouring gradual appreciation of the trade-weighted Singapore dollar.

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Authors: 

Simon Harvey, Head of FX Analysis

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

 

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