FX Moves
USD
The dollar closed last week only two-tenths of a percent higher, having dropped 0.3% on Friday even as growth indicators for April came in stronger than expected. This was seemingly inconsistent with the guidance from Fed officials, which welcomed the initial signs of deceleration in the inflation data but continued to sound caution over the resiliency of the economy. Based on this guidance, it was no surprise to see front-end Treasury yields continue to track higher on Monday, but this didn’t jolt the improvement in risk sentiment within markets as the Fed’s dismissal of further rate increases has ultimately dragged rate volatility lower.
With US markets and much of Europe closed yesterday, Friday’s drift lower in the dollar extended at the start of the week. Risk assets generally outperformed in this quieter market, especially as the recent mix of US data once again supported a soft landing outcome for the US. Given the rebound in the price of crude as concerns over the Israel-Palestine conflict amplified, it was understandable that the Norwegian krone sat at the top of the table yesterday, having rallied 0.7%. However, NOK wasn’t alone in making notable ground against the greenback, with other high beta currencies such as SEK, NZD and AUD also notching gains of 0.4%. This dynamic has continued again this morning as news of fresh stimulus for China’s ailing property market has coincided with a stronger reopening in US Treasuries and equity futures. This time, however, it is the Swedish krona that is trading at the top of the G10 table, up 0.5% against the dollar and 0.4% against the euro. This extends SEK’s winning streak to a third consecutive day as the mood music around the currency has begun to improve. Not only has the improvement in the euro area’s PMIs helped to support the satellite currency, but so too have headlines around SBB’s joint ventures with US investment firm Castlelake to ease the financing pressures on the debt-laden commercial real estate lender. While we welcome the recent rally in SEK as it brings the currency back towards our estimates of fair value, we think the rally should begin to run out of steam as weak cyclicals and a dovish Riksbank should act as a headwind ahead of any eventual Fed easing.
The Swedish krona isn’t the only currency that we think could run out of momentum this week. We suspect the bearish trend in the dollar should also come up against some resistance as it runs into key technical levels, especially seeing as Governor Waller’s comments last week have de-emphasised the importance of April’s inflation data on Friday. Instead, with limited market-moving data due out this week, and some key data due out of the eurozone and Japan likely to support more dovish outlooks for their respective central banks, the broad dollar should find support at current levels. That said, we expect overall moves to be limited, barring any significant idiosyncratic repricing in US yields and equities.
EUR
After a busy end to last week with both flash May PMIs and Q1 negotiated wage data to chew over, this week it is May inflation numbers that should grab the attention of euro traders. That said, monetary policy remains in the driving seat for the euro and in this regard, we suspect the battle lines have already been drawn amongst the Governing Council. While a June rate cut is not in question, the rise in negotiated wages from 4.5% in Q4 2023 to 4.7% in Q1 has likely provided all the ammunition needed by the ECB hawks to rule out a cut in July. This should keep short run easing expectations well anchored regardless of how this week’s CPI data prints. As such, while a modest rebound in both the headline and core prints is expected by markets as Easter effects continue to flush through, the impact for the euro should be relatively muted, with all eyes now on the ECB and their early June policy meeting for a sense on the next steps for eurozone rate cuts.
GBP
While general election news dominated the headlines over the bank holiday weekend, on the data front, there has been little to write home about so far from a sterling perspective. The remainder of the week is likely to bring more of the same too, with only a handful of second and third tier publications set for release and an election campaign that is continuing to build up a head of steam. We would note that BRC shop price data released this morning undershot expectations of 1.0% YoY, printing at 0.6%, which should be good news for the BoE at the margin. Even so, with the MPC having identified services disinflation as key to short run easing prospects, only to then see April’s CPI print beat Bank staff forecasts, traders continue to see only minimal risk of a cut to Bank Rate in June. The upshot is that short run policy expectations remain well anchored, despite these latest disinflation indications from the BRC, a dynamic that has seen sterling start the week on the front foot, up 0.25pp against the dollar and the euro so far, defying pre-election jitters.
CAD
A quiet Monday session saw the loonie drift modestly higher against the dollar, even as US traders enjoyed a long holiday weekend. Given this, cross-currents were seemingly in the driving seat for CAD once again, with the loonie’s rally supported by both a positive session for equities to close out last week, and a grind higher for oil prices. For the remainder of the week, however, SEPH employment data and a Q1 GDP reading are likely to be the focus on the Canadian side of the equation, released on Thursday and Friday respectively. All told, we doubt either will do much to upset market expectations of a June rate cut from the BoC which currently stand at 66%. Specifically, the bar for March’s SEPH reading to suggest anything other than a cooling labour market looks high. Similarly, with consensus expectations projecting a solid 2.2% QoQ annualised GDP print for Q1, risks look skewed towards an undershoot. Taken together, this should see the loonie trade with a modest softening bias through the back end of the week if our expectations are met, as markets continue to converge on the June meeting as the most likely start date for BoC rate cuts.