News & analysis

USD

As anticipated, yesterday was a fairly quiet session in the expanded majors. Most of the intraday volatility took place in USDZAR as it threatened to break below the 18.00 handle as Cyril Ramaphosa was sworn back in as President of a now coalition majority and retail sales and inflation data was published. While political events went smoothly with Ramaphosa sworn in by midday, the data proved somewhat more damaging. Most inflation measures landed in line with expectations, suggesting the SARB may find some wiggle room to ease rates into year-end, which now looks increasingly relevant seeing as the strong recovery in consumption at the start of the year stalled at the beginning of the second quarter, with retail sales growing just 0.5% MoM and 0.6% annually in April. Given the mixed data and the less attractive entry points, we hold reservations about joining the ZAR rally at these levels, especially given the uncertainty over the ANC coalition’s ability to govern. On the latter, the next few days should prove key as Ramaphosa is set to announce key cabinet positions, which should shed some light on the extent to which policy continuity will progress. Elsewhere in the EM space, the central bank of Brazil (BCB) held rates at 11.5% as we had expected. The decision wasn’t without surprises, however. Contrary to our expectation, all members of the BCB’s decision-making body (Copom) voted in favour of the decision, marking a turnaround from May where 4 of the 9 Copom members, all of which appointed by President Lula da Silva, voted for a faster pace of easing. The BCB’s show of solidarity should prove BRL supportive at the local market open today, unless it aggravates a strong response from the government who are actively seeking a more pro-growth agenda at a time when their fiscal accounts are under increasing pressure.

Ahead of the local market open in Brazil, the market focus will rest on Europe where central bank decisions from Switzerland, Norway, and the UK are set to be delivered. Of the three, the Swiss National Bank decision is set to be the most contentious. The macro data flow since the SNB last met in March warrants the central bank holding rates at 1.5% today, but the recent appreciation in the franc, partly on increasing concerns over the French election but also due to the SNB Governor’s expressed desire, poses a substantial risk to this view as the SNB likely prefers to defend against an overly weak as opposed to strong currency. Markets are currently prioritising the latter argument, pricing a 70% chance of a cut today, up from 55% just a week ago. Even so, any decision to cut will likely jolt markets purely because of the saturated short EURCHF positioning, while any decision to hold should see the cross fall further. Key to determining the extent of the move will be the central bank’s language around its FX actions, which should indicate how it intends to smooth its policy decision in markets over the coming quarter.

EUR

Price action in the single currency wasn’t inspiring yesterday, with traders instead taking to the equity and bond market to voice their concerns over the political environment. Today, we suspect more of the same is in store. From an FX perspective, the only key variable to monitor will be euro crosses, specifically EURCHF which has been currency traders favoured hedge for European risk. As mentioned above in the USD section, the SNB could well cut rates today to weaken the franc, posing a direct threat to many of these short EURCHF political hedges. The SNB meets at 08:30 BST, before the Norges Bank at 09:00 BST and the BoE at 12:00 BST.

GBP

After yesterday’s CPI release showed inflation returning to 2.0% in May, today sterling traders will have their attention squarely focused on Threadneedle street where the MPC is set to deliver a policy decision at 12:00 BST. Despite price growth hitting the Bank of England’s target for the first time since July 2021, we see very little possibility that the MPC cuts rates today. Even as headline inflation has cooled rapidly, a large portion of this slowdown has been attributable to negative energy base effects that are set to reverse later this year. Services inflation, by contrast, was seen growing at 5.7% YoY in May, still far too hot in absolute terms but also some way above Bank staff forecasts that predicted this measure falling to 5.3%. Whilst this alone should make a rate cut today unlikely, the ongoing election campaign seals the deal. As is typical, the BoE has suspended all speaking events during the campaign period, meaning they would have no way of explaining a rate cut to markets, which currently price the likelihood of such an outcome at just 1.5%. Surprise easing against this backdrop risks triggering notable market disruption, which should rule out such a move. Instead, the key focus for today will be on the policy statement, the minutes of the decision, and specifically whether the MPC keeps the door open to cutting rates in August. We think they will based on our view that the current resilience in price pressures and wage growth is temporary, a perspective we think is shared by core MPC members too when considering commentary from Andrew Bailey following the May meeting. That said, this would also be a little more dovish than markets expect following yesterday’s inflation data, which left market pricing of an August rate cut at just 36%. If we are right these odds should climb today, weighing on sterling in the process.

CAD

While a US holiday took the focus off North America yesterday, USDCAD still weakened at the margin, falling by just shy of 0.1%. Most significantly though, the loonie’s fractional move higher was undisrupted by the release of June’s BoE summary of deliberations, where there had been a risk that the BoC would lean into the idea of easing at back-to-back meetings, given the weakness in underlying growth and inflation indicators in Canada. That said, we thought the Governing Council was likely to be more circumspect in their commentary, a view that was borne out in yesterday’s communications. Members agreed to emphasise that rate decisions would be taken one meeting at a time, with a range of views over risks to the likely disinflation path. All told this was sufficient to leave market pricing for the July policy meeting broadly unmoved, with traders continuing to price a roughly two-in-three chance of cut.

 

 

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