Market Briefing: Trading Ranges Narrow Across Currency Markets
Trading volumes are subdued in foreign exchange markets ahead of a week bereft of major central bank announcements or US economic data releases. Treasury yields are steady across the curve, the dollar is holding firm against other G10 units, and equity futures are little changed from Friday’s close.
Volatility continues to subside as it becomes clear that last month’s turmoil among regional lenders hasn’t transmuted into a wider systemic issue or a convulsive contraction in credit tightening. Investors are prepared for a modest slowdown in overall lending volumes, but with bank earnings remaining relatively strong and small bank deposits climbing back, fears of a deeper decline are abating - and turbulence in interest rate markets is beginning to come down, helping to support higher-yielding currencies against the dollar.
But we think there’s room for a upward repricing: if the economy fails to slow meaningfully over the coming months and the Federal Reserve shows no desire to begin cutting rates—defying long-standing market expectations—short-term rate differentials could widen in the dollar’s favour once more, upsetting some of the trading dynamics that are currently dominating price action.
China’s National Bureau of Statistics is widely expected to say the economy grew at a 4-percent annualized pace in the first quarter, but a stronger print is possible: the services and manufacturing sectors are exhibiting signs of a solid reopening rebound, and data released last week showed exports surging almost 15 percent in the year to March. Earnings reports from China-focused luxury houses like LVMH also suggest that retail spending is growing rapidly, helping narrow the gap between reality and the overly-optimistic expectations that were embedded in markets late last year.
Data out tomorrow morning is likely to show the UK labour market softening, but not at the Bank of England’s desired pace. Consensus estimates suggest the unemployment rate held steady in the three months to February, with annual private sector wage gains slipping to 6.5 percent, down from the 7-percent pace seen in the prior release. Wednesday’s consumer price index release should exhibit a similar dynamic - headline inflation might ease as energy prices decline and base effects work their way through the calculation, but a closely-watched measure of services costs is expected to fall only modestly, to 6.4 percent from 6.6 percent previously.
Markets are currently assigning circa-80-percent odds to another quarter-point hike at the Bank’s May 11 meeting, but economists are less certain. The Monetary Policy Committee—already one of the world’s most visibly-fractured rate-setting bodies—looks increasingly likely to stay on hold as officials bet on a gradual decline in price pressures in months ahead. The pound is up 2.7 percent against the dollar on a year to date basis, but has run into stiff resistance around the 1.25 handle, suggesting that expected monetary policy differentials may be fully priced in.
The Canadian dollar is slightly weaker in the run-up to an inflation print that should bring evidence of a sharp deceleration in overall price growth. Tomorrow morning, Statistics Canada is expected to report a 4.3 percent increase in headline consumer prices in the year to March, but we suspect risks are tilted to the downside. Energy prices are down sharply from last year’s peak, food costs are likely to inch lower on a month-over-month basis, and the range of categories showing above-target inflation should continue to narrow, bringing the median and trimmed-mean measures down to earth - while alleviating pressure on the Bank of Canada.
This comes as evidence of a more meaningful slowdown in the economy accumulates. Although labour markets (typically a lagging indicator) remain strong, rising interest burdens appear to be cutting into household spending power, putting pressure on retail sales, business investment levels, and overall sentiment levels. It’s too early to tell, but activity in Canada’s all-important housing market seems likely to soften in the months ahead as rollover costs continue to squeeze homeowners and still-elevated mortgage rates sideline marginal buyers. Although short-term gains could continue, we think the longer-term bull case for the loonie remains relatively weak.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
@KARL_SCHAMOTTA
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