News & analysis

USD

The weekend brought about some clarity in the political sphere, which has seen the broad dollar unwind around a third of a percent in early trading. Not only did the first round of the French elections detail a lower probability of an outright majority for Marine Le Pen’s far-right party and lead to a moderate rally in EURUSD, but after a month of coalition and cabinet talks, re-elected President Cyril Ramaphosa finally announced the next South African government on Sunday evening. With news reports suggesting the coalition was on the edge of collapse last week as cabinet appointments stalled, the eventual announcement of the incoming government along with news that Finance Minister Enoch Gondongwana has been re-appointed, signalling fiscal continuity, triggered a substantial rally in the rand this morning. The currency is now trading back below the psychologically significant 18.00 handle this morning having posted gains of over a percent.

Staying within the political arena, last week’s first Presidential debate in the US has led to increasing pressure on President Biden to stand down at the next election. The swing in polling towards Trump following the debate is undoubtedly dollar positive, and while the US election is still four and a half months away, any decision from the Democrats regarding Joe Biden’s future ahead of their national convention in August will be key as to whether the hedging for a Trump Presidency remains a background bullish driver for the dollar.

Outside of politics, one eye will remain on developed market interest rates. The ECB’s central banking forum in Sintra kickstarts this evening, with the main event taking place tomorrow when President Lagarde is joined by Fed Chair Powell and BCB President Campos Neto. Powell’s characterisation of the US economy will be key following last month’s sudden stop in core services inflation. Any optimism by Powell could negate the hawkish impact of Wednesday’s FOMC meeting minutes. Towards the end of the week, North American payrolls will then be the dominant factor before markets turn to the second round of the French elections. Here, we think the US data should keep easing expectations for the Fed contained below two cuts this year, while the Canadian data should endorse further rate cuts from the BoC this month.

EUR

The first round of the French election largely confirmed the preliminary polling, with Marine Le Pen’s far-right National Rally picking up 34% of the vote and a larger-than-usual number of seats outright according to Ipsos’ estimate. That said, while a majority for the National Rally remains a possibility, the larger-than-expected outturn for Macron’s centrists and endorsement from Melenchon’s left coalition in seats where their candidates are set to lose makes this less likely than markets initially feared. This has led to a moderate tightening in French-German yield spreads, a bid in French stock futures, and a 0.5% relief rally in EURUSD in early trading this morning.

Based on our assessment of the first round results, the tentative unwind in eurozone risk premium is well calibrated. However, we caution against running this theme much further, especially in FX markets where a 0.5% rally in EURUSD accounts for roughly half of the risk premium markets had factored coming into the first round. After all, a National Rally majority in the legislature remains a possibility. This week will be decisive as to whether that transpires after Sunday’s second round vote as candidates have until 6pm on Tuesday to confirm their participation. As mentioned, the leader of the New Popular Front, Jean-Luc Melenchon, has already endorsed candidates from Macron’s centrist Ensemble in seats where their candidates are set to place third, while this has only been vaguely reciprocated by the current government. An alliance against the far right will be required to prevent National Rally from taking an outright majority in the National Assembly, with polling currently suggesting that National Rally are leading in 296 constituencies, giving them a majority of just 7 seats at present. We continue to favour hedging the risk of a National Rally majority in short EURGBP and EURNOK positions given lighter positioning than outright EURUSD and EURCHF shorts and supportive rate differentials.

GBP

While French elections held market attention coming into the new week, next up is a UK general election, scheduled for July 4th. That said, the UK vote should be much less dramatic than its continental counterpart. Labour hold a 20% lead in opinion polls ahead of Thursday’s election, all but guaranteeing a large parliamentary majority. Our base case is that the resulting stability, combined with modest reforms to boost productivity growth, should offer modest upside support for sterling over the medium term. In the more immediate future, however, the impact of the poll should be minimal, with a large polling miss needed to produce a materially different outcome to expectations. Even so, where there are risks, they are tilted to the downside. Specifically, we suspect that markets would be unlikely to welcome a scenario where the Conservatives fall to third place in seats won. If realised, this would mean limited parliamentary scrutiny of Labour’s agenda in power, risking a leftward shift from Keir Starmer’s current moderate policy platform, with such an eventuality likely to see a degree of risk-premia priced into sterling. Until then however, a limited domestic data calendar is unlikely to offer much impetus for the pound, a dynamic that is playing out this morning. While Nationwide house price index showed a 0.2% MoM increase in June, above market expectations for a -0.1% uptick, it is news from across the channel that is driving sterling price action, with GBPUSD up 0.3% and GBPEUR down 0.2% so far this morning, as traders continue to digest the outcome of the French polls.

CAD

Even as political risks in Europe dominate market thinking to start the week, Canadian jobs data on Friday should not be overlooked. This week’s jobs report is the final labour market print before the Bank of Canada next meets, and likely to be key to determining whether the Governing Council can ease rates this month. Admittedly, last week’s surprise uptick in price growth put a notable dent in the market implied odds for the Boc to cut rates on July 24th, with swap pricing currently suggesting just a 45% chance. Even so, we would be surprised if easing bets do not climb on Friday. The unemployment rate is expected to rise to 6.4%, up from 6.2% in May, while our bias is to see another weak payrolls print given further signs of soft growth momentum over recent data prints, a point that is also likely to be reinforced by PMI readings on Thursday as well. If we are right, this will add further weight to the idea that economic slack is continuing to weigh on inflation, and that last month’s spike in price growth was an aberration, not the start of a trend. Taken as a whole then, this sees risks to the loonie skewed to the downside this week, and which should see USDCAD tracking above 1.37 heading into next weekend.

 

 

Disclaimer
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.