Market Briefing - Dollar Strengthens Ahead of June Inflation Print

The dollar is holding near a two-year high and yields are broadly flat before an inflation report that is expected to ratify the case for a 75 basis point move at the Federal Reserve’s next meeting.

Year-over-year consumer price growth is expected to climb above 8.8 percent in June, up from 8.6 percent in the prior month as soaring grocery and gasoline costs drive the inflation basket higher. This would mark the biggest annual jump since 1981, alarming central bankers who worry about the psychological impact record-setting headlines might have on consumer expectations.

But below the hood, the core measure - which strips out highly volatile food and energy categories - is seen hitting 5.7 percent, decelerating slightly from the 6 percent recorded in May. With goods and commodity prices slipping, breakeven rates, which reflect market views on longer-term inflation pressures, continue to trend down. The five-year rate has fallen to 2.51 percent, down from 3.73 percent in March, and the ten-year is at 2.31 percent after touching 3.03 percent earlier in the year.

To some extent, “peak inflation” is already in the rear view mirror.

The euro is trading slightly above parity with the US dollar, after repeatedly failing to break through heavy resistance at the big round number. The lowest for-size euro-dollar interbank trades executed so far appear to have been agreed at 1.00004, and traders are warily watching for anything that might trigger a break lower. Longer-term outcomes are essentially binary - if Russian gas supplies are further reduced, the euro will continue its descent. If some form of detente is reached, a neck-snapping rally could ensue.

Japan’s yen climbed overnight, but is vulnerable to a fall if this morning’s inflation data sends US yields higher.

Crude prices are inching higher after yesterday’s losses, but both the West Texas Intermediate and Brent benchmarks remain sharply weaker on a month-to-date basis as demand concerns hammer speculative activity.

The Bank of Canada is widely expected to hike its policy rate by 75 basis points later this morning, as it responds to searingly-hot prices and signs of overheating in other areas of the economy. The accompanying Monetary Policy Report is likely to bring upgrades to the central bank’s inflation projections, along with a lowering in real growth forecasts.

Price action in the loonie could prove interesting. A forcefully hawkish message or larger-than-expected hike could deliver upside in the currency, solidifying bets on an aggressive hiking cadence in the autumn - some market participants expect a 75 basis-point move in September, followed by 50-point moves at the October and December meetings. But downside risks are also growing, with evidence of a downturn in housing markets adding to a global growth scare in threatening Canada’s rate trajectory. An acknowledgement of these uncertainties - could see the loonie sell off in the minutes after the announcement or during the post-release press conference.

Upcoming Events

WEDNESDAY

USD    Consumer Price Indices, June

CAD    Bank of Canada Rate Decision

CAD    Bank of Canada Monetary Policy Report

USD    Department of Energy Weekly Inventories

THURSDAY

USD    Weekly Jobless Claims

CNY    Gross Domestic Product, Q2

FRIDAY

USD    Retail Sales, June

CAD    Existing Home Sales, June

USD    Baker Hughes Weekly Rig Count