Market Briefing - Euro Flirts With Parity, Markets Slump More Broadly

As North American markets open, the euro is making like the Beastie Boys, fighting for the right to parity. The euro-dollar exchange rate momentarily touched the 1.0000 mark this morning after a report showed German investor confidence falling to the lowest since 2011, but has since backed off as market participants defend barrier options struck around the big round number.

As discussed in our weekend note, parity has no particular economic significance for the euro area, but broadly reflects a weakening in growth expectations, deteriorating interest differentials, and fear of a Russian gas shutoff. The Nordstream 1 pipeline, a critical conduit for European gas markets, is currently shut down through July 21 and investors are worried about the potential for a preemptive reduction in supply when the repair effort ends. A drop in flows could send the common currency spiralling further down, while a rebound could trigger a rally.

Recession fears continue to drive markets more generally, with the dollar and yen rising slightly as investors seek shelter from the storm. Equity bourses are looking at a soft opening, and commodity markets are extending losses, with both of the major oil benchmarks down almost 3 percent. Commodity-linked currencies like the Aussie and Canadian dollar are on the defensive.

A thin data calendar beckons today, with no major economic releases scheduled.

Governor Tiff Macklem is expected to lift the Bank of Canada’s overnight lending rate by three quarters of a percentage point at tomorrow’s meeting, with policymakers willing to risk a downturn in housing markets and the broader economy as they seek to bring down inflation. Updated forecasts contained in the accompanying monetary policy report could prove more consequential for currency markets - price expectations are likely to climb even as growth projections are revised down.

Consumer price inflation is expected to top 8.8 percent year-over-year when the Bureau of Labor Statistics releases the latest numbers tomorrow. Forecasts for the Federal Reserve’s July meeting are likely to remain unmoved, but longer-term rates could shift if the report contains evidence of a moderation in goods demand and a softening in core prices.

Longer-term inflation expectations are dropping more widely, particularly after yesterday’s numbers from the Federal Reserve Bank of New York. The bank’s Survey of Consumer Expectations showed householders becoming less fearful in June, with inflation expected to hit 3.6 percent in three years, down from 3.9 percent in May. In five years, price growth is seen running at 2.8 percent, down from the prior month’s anticipated 2.9 percent rise.

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