Written by Convera’s Market Insights team
Retail sales continue streak of strong data
Boris Kovacevic – Global Macro Strategist
The US economy keeps on giving and investors keep on pricing out policy easing from the Federal Reserve. That has been the story of the past few weeks, which has culminated in markets now expecting less than two rate cuts this year. Yesterday’s stronger than expected retail sales (+0,7 m/m) for March lined up with the upside surprises of both the jobs report and latest inflation print, suggesting that economic momentum remained solid all throughout the first quarter.
Treasury yields on the long end have risen to their highest level since November, dampening risk appetite and putting the S&P 500 on track for its third consecutive weekly decline. At the same time, the global commodity index has risen by 11% so far this year. Taken together, this has created a perfect environment for the Greenback to shine, as its benefiting from its position as a high yielding, high growth, commodity backed safe haven currency. As central banks outside the United States continue to lay the groundwork for rate cuts, policy divergence and momentum will favor the reserve currency. The US Dollar Index appreciated for a fourth consecutive day, extending its year-to date gain to 4.7%.
However, it will be interesting to see how much of this shift has already been reflected in markets and how much more rate cuts can be priced out for the Federal Reserve. This is hard to answer right now due to the current push (global inflation impulse rising) and pull (weakening leading economic indicators) effects influencing the dollar and Fed pricing. Geopolitical developments relating to the conflict in the Middle East add to the uncertainty surrounding the future policy path of central banks and the inflation trajectory. However, so far, markets seem to have taken the escalation by Iran with stride as Western forces race to avert a full blown retaliation from Israel.
CAD steadies near 6-month lows ahead of CPI
Ruta Prieskienyte – FX Strategist
The Canadian dollar is unable to find its footing against the US dollar and continues declining for the 5th consecutive day, posting a fresh 6-month low above $1.3800 level. The upwards momentum in USD/CAD remains well supported by the underlying strong bullish sentiment surrounding the Greenback on downsized Fed bets.
Market participants now look to the release of the Canadian CPI figures due shortly today. After two months of downside inflation surprises, the March CPI report is expected to show a modest rebound, driven by energy prices as well as housing component. However, the diffusion of the annual inflation is expected to continue improving. In February 2024, the share of CPI categories with greater than 3.0% annual inflation fell to 42%, down from 80% in January 2023. The Bank of Canada Governor Tiff Macklem specifically cited diffusion as a key indicator of underlying inflation pressures — so a persistent broadening of disinflation bodes well for a policy rate pivot this year. In the April meeting, the BoC kept rates unchanged, but kept a June cut on the table. Currency, the market implied probability of a June cut stands at 89%, the highest in 2-months.
With overnight USD/CAD ATM implied option vols climbing to a 10-month high, today’s Canada’s CPI print could be a market-mover, with an upward uptick in the headline report providing the much-needed strength for the Canadian dollar. Meanwhile, the US economic docket features the release of housing market data and Industrial Production figures. Apart from this, speeches by influential FOMC, including Fed Chair Jerome Powell, and the broader risk sentiment will drive the USD demand. This, along with Oil price dynamics, should provide some meaningful impetus to the USD/CAD pair and allow traders to grab short-term opportunities.
Euro gets a boost from ZEW survey
Ruta Prieskienyte – FX Strategist
The euro continues to struggle to find its footing, trading close to a 6-month low and over 1% below Friday’s peak of $1.0732.. With the ECB April monetary policy meeting and US inflation updates in the rear-view mirror, attention this week turns to relative economic performance and how it is being interpreted by central bankers.
The latest report revealed that industrial production in the Eurozone rebounded by 0.8% m/m in February, marking a partial recovery from a revised 3.0% downturn in January. On a yearly basis, industrial production contracted by 6.4% in February, extending the 6.6% contraction observed in the previous month. Outside of data, over the past few days we have received further validation of impeding policy divergence between the Fed and the ECB. ECB’s Stournaras and Simkus show openness to cut 3, potentially even 4, times by year end, despite Lagarde’s unwillingness to commit to a specific policy path during the conference last Thursday. Overall, the sentiment across the Governing Council is growing increasingly more dovish. Swaps are currently pricing an almost sure thing of a June cut, with probability rising to 89% and expect 82bps cumulative rate cuts by year-end.
Today’s ZEW survey gave the euro a marginal boost as the report improved for the 9th consecutive print. EUR/USD recovered some ground, reclaiming $1.0630 handle but the gains remain negligible as he downside pressure remains high and the US dollar is still bullish.
GBP and EUR extend 1-week losses to over 1.5%
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 15-19
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
