News & analysis


Yesterday proved a mixed session for the broad dollar. With Asian markets playing catch-up to Friday’s payrolls report and the euro also weighed down by the news of a snap election in France, the DXY index inched 0.2% higher on the day. However, this largely reflected developments in USDJPY and EURUSD, the two main components in the index, as the dollar traded lower against the rest of the G10 complex. The distribution of returns across the expanded majors was broadly similar, with CE3 and Asian currencies leading losses, while both the Mexican peso and the South African rand traded in the green having previously been under pressure due to idiosyncratic election risk.

This morning, price action in the broad dollar has been more consistent, with the greenback remaining in favour even as volatility in global equity futures and DM bond markets subsides. That said, moves across the expanded majors have generally proven limited heading into the European open. The Mexican peso is proving an exception, however, as incoming President Claudia Sheinbaum suggested that constitutional reform would be a top priority of the new Mexican congress, confirming investors’ worst fears following Moreno’s achievement of a supermajority. This has seen the Mexican peso sink over a percent overnight, with losses limited to only a percent by the fact that Sheinbaum also opened up the reform process to scrutiny by law schools, civil society groups, and academics. This partially diluted the risk that the reform process would dramatically undermine the level of democracy in Mexico and thus the nation’s investment profile.

Idiosyncratic factors will remain in the driving seat in terms of market volatility today, with conditions in the broad dollar set to remain quiet with only the NFIB measure of small business optimism due out ahead of the blockbuster CPI and FOMC double-header tomorrow. Given the increased amount of cross-asset risk and our view that the Fed will likely relay a hawkish message tomorrow, we expect the broad dollar to remain in favour today.


European assets remained in the spotlight yesterday, with the initial market jitters to the news of a snap election in France ultimately binding. The spread in French 10-year yields over their German counterpart rose to fresh year-to-date highs, while the CAC 40 closed 1.35% lower on the day with losses pronounced in French banks due to concerns over their domestic bond portfolios and the risk they could be targeted for windfall taxes. In FX markets, the euro managed to retrace some of its earlier losses against the dollar, but still closed 0.4% lower on the day. Moves were starker on euro crosses, with GBPEUR rising to a fresh 21-month high and EURCHF dropping to levels last seen in mid-March on a classic regional safe haven bid. Activity in the options space also spiked, with 1-month risk reversals turning sharply negative, implying greater hedging demand for downside EURUSD protection over the upcoming election period.

Conditions in European markets have temporarily stabilised this morning as traders await the announcement of National Rally’s policy platform. While we doubt Le Pen will re-engage in market destabilising policies such as leaving the euro, the party’s manifesto remains key to determining the economic and fiscal implications of a majority far-right government, the risk of which has naturally increased over recent days. With very little eurozone economic data due for release this week and the discussion around the ECB’s next steps largely on ice until September, all eyes will remain on French political developments, which we expect to come thick and fast given the first round of voting is set to take place in little over two week’s time.


It has a busy start to the week for sterling traders. The news of a snap election in France saw GBPEUR trading to highs not seen in almost two years on Monday, with this followed up by UK labour market data published at 07:00 BST this morning. Admittedly this morning’s wage data proved somewhat less dramatic for the pound, landing broadly in line with expectations despite risks that April’s rise in the National Living Wage could have seen a notable one-off jump. In our view though, we still think there is good reason for the MPC to be cautious at this juncture, with risks that the NLW implementation has pushed some of the wage rise into May, and with this not set to be clear for another month. All told, this should prevent the MPC from turning overly dovish in the short term, supporting sterling upside on a tactical horizon. For now though, relief that these upside risks have failed to materialise has seen sterling soften modestly so far this morning. More broadly, there are still downside risks to our sterling view, not least as election manifestos are published this week, with the Conservatives set to release theirs this afternoon. While unlikely to ever be implemented given the current polling gap, a badly received set of policies could turn this election into an extinction event for the Conservatives, an outcome we think would also be badly received by markets and the pound, if it looked likely.


Loonie price action was, perhaps understandably, muted on Monday. USDCAD traded in just a 0.2% range with little data out of either Canada or the US to offer impetus for the pair. Moreover, cross currents also offered little direction too. A mixed session for equities belied a broader risk off move on the back of news out of Europe, signalled by a climb in long end yields in particular, that largely negated a rise in oil. Moreover, with little of note in the data calendar, today looks set to bring more of the same, with tomorrow’s US CPI and Fed meeting still likely to be the centre of attention for USDCAD traders for this week.



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