News & analysis


Data yesterday showed a much softer consumer backdrop in the US in Q2 relative to the start of the year. Core retail sales undershot expectations by 0.1 percentage point in May, printing at 0.4% MoM. Moreover, April’s data was downwardly revised, from -0.3% to -0.5% MoM, leaving the core measure down -0.14% in the first two months of the second quarter. While the data looks concerning in nominal terms, once adjusting for significantly cooler inflation pressures over the past two months, the consumption picture looks less severe. So while core retail sales surprised expectations to the downside yesterday, it didn’t miss by enough of a margin to spark a haven bid in the greenback, as we initially expected given concerns over the root cause of the sudden stop in US inflation in May. That said, yesterday’s session didn’t completely fly in the face of our expectations. While the dollar declines alongside Treasury yields on the data, the DXY index ultimately closed flat on the day, evidencing our core view that overall market uncertainty makes it unattractive to turn structurally bearish on the dollar at this point in time.

The broad dollar continues to trade in this vein this morning, extending losses against high beta FX on the continued resilience of global equities and the lower yield backdrop, while continuing to make incremental gains against the euro, Japanese yen, and the Kiwi dollar, all of which have underperformed month-to-date. There is little in the G10 data calendar to prompt markets to reverse course, with just the latest BoC minutes at 18:30 BST and New Zealand’s Q1 GDP at 23:45 BST set to be released today. With little developments set to transpire in G10 markets, the spotlight is likely to remain on EM currencies, where inflation and retail sales data for May are due out of South Africa before a contentious BCB meeting takes place in Brazil this evening. With the data expected to show inflation paving the way for the SARB to cut rates in the fourth quarter alongside a healthier consumer backdrop, we suspect the mood music is likely to remain positive for ZAR, which has rallied over 4% month-to-date to reverse its initial post-election drop and then some. At the other end of the spectrum is the Brazilian real. Trading 3.5% lower year-to-date, the real faces further downward pressure from today’s BCB decision, where both a hold and a 25bps cut pose concerns around the government’s influence on monetary policymaking, especially after President Lula yesterday slammed the BCB governor for being too political. In our view, the evolution of the data warrants the BCB to hold rates, but any decision to do so may catch the ire of the government, fuelling investor concerns over the future of the central bank’s credibility. Either way, the local market open tomorrow should be explosive.


Price action in European markets yesterday raised some interesting questions. While spreads in back-end bond yields narrowed and the CAC 40 bounced, there was still significant interest to hold defensive positions in European FX. EURUSD 1-month risk reversals, which map the relative cost of hedging upside over downside protection, remained deeply negative, while short EURCHF continued to receive heavy demand, leaving the cross close to 2% lower on the month. Election uncertainty continues to be a major market driving in Europe, especially as yesterday’s data did little to change the economic outlook. We suspect it will be more of the same today, with the eurozone economic calendar essentially barren until June’s flash PMIs are released on Friday. That said, while the data calendar is sparse for EURUSD, the next 24 hours mark a busy time for euro-crosses. Decisions from the Swiss National Bank, Norges Bank, and the Bank of England should cause some volatility, especially in EURCHF where the central bank’s decision to hold or cut is finely balanced. While we think intermeeting commentary from SNB Governor Jordan and the recent macro dataflow warrant the SNB holding rates, the recent surge in the franc has reduced our confidence in this view, especially as the SNB has shown a preference to defend against an overly weak as opposed to strong currency.


Headline price growth in the UK cooled to 2.0% in June, matching the Bank of England’s inflation target for the first time since July 2021. Even so, policymakers are unlikely to be taking victory laps at their latest MPC meeting. Crucially, services inflation overshot Bank staff forecasts once again. Having been expected to fall to 5.3%YoY this month, the reading actually printed at 5.7%. To us, this looks like passthrough from April’s rise in the National Living Wage, with the rise in prices across the services sector relatively broad based. With this in mind, we think there will be a degree of caution from the MPC in their deliberations, albeit they will likely choose to run back their May communications for now. In our view, this inflationary stickiness is likely to be temporary, meaning there is still sufficient evidence for the BoE to signal that it could cut rates in August. As such, whilst markets have modestly pared their expectations for an August rate cut from 50% to 40% post-release, boosting sterling by two tenths against the dollar and the euro, this bounce could well reverse tomorrow lunchtime on a Monetary Policy Statement that is a little more dovish than is now expected from the BoE.


The Canadian dollar has been stuck in a wedge this week, pushed moderately higher by a strong equity backdrop but capped by dovish BoC expectations. We suspect the latter dynamic will prove the more dominant today as the Bank of Canada releases the deliberations from its latest meeting, which we expect to cut in a dovish direction. Unlike its peers, the Bank of Canada hasn’t communicated its intentions to pause its easing cycle after cutting rates earlier in the month, which we suspect is due to Canada’s weak cyclical momentum that we have been warning about for some time. While Governor Macklem avoided previewing the BoC’s next steps at the press conference earlier this month, insisting journalists to “just enjoy the moment a bit”, we think today’s minutes will formalise the BoC’s considerably more dovish path relative to its G7 peers. With markets pricing just over two-and-a-half cuts from the Canadian central bank over the next four meetings, confirmation of our view should see USDCAD rally back towards the 1.38 handle, a level that it will likely break in the coming week on weaker inflation data.



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