CAD
The BoC’s Wednesday rate decision is front and centre for the loonie this week. As we have pointed out previously, a combination of soft domestic growth, an unwinding labour market, and inflation that is now continuing to track back to target after a temporary uptick, offers the kind of backdrop where anything other than a rate cut would fly in the face of economic logic. Even so, while swap markets are inclined to agree, seeing the odds of a rate cut at 93%, economists remain somewhat less convinced, with one in three surveyed by Bloomberg expecting a policy hold on Wednesday. This should leave some scope for the loonie to soften this week, however, assuming our base case for a 25bp from the Governing Council is realised. With this in mind, we continue to see our one-month target of 1.38 for USDCAD as very much in play on the back of widening rate differentials between the Fed and the BoC.
USD
The dollar trades are marginally softer at the start of the week as traders continue to digest news from Sunday evening that President Biden is dropping out of the US presidential race. This leaves Vice President Kamala Harris as the strong favourite to secure the nomination as Democratic candidate for President, having garnered the backing of both Biden and several other major players in the Democratic party overnight. Granted, this is not yet a done deal, but betting markets currently place Harris’ chances of sealing the nomination at 84% – in other words, close to a certainty. More interestingly, they also now put the odds of a Democrat winning the Presidency at 44%, a significant improvement on recent weeks, which had seen this figure slip to as low as one in three. Given the market bias to see a second Trump presidency as dollar-positive, this latest turn has naturally seen the greenback ease modestly this morning. That said, politics is not the only story in town for FX traders this week, with S&P PMIs, an advance reading for Q2 GDP, and June PCE numbers all in store, adding up to what should be a busy week for markets.
CNY
While US politics has dominated the headlines overnight, news out of China also contained a surprise, with the PBoC announcing an unexpected 10bp cut to the 7-day reverse repo rate, as well as both the 1-year and 5-year loan prime rates. Markets had expected the PBoC to keep rates unchanged, with the move to ease rates also accompanied by a higher USDCNY fixing of 7.1335. This narrowed the fixing error to -1309pips, down from -1398 as of last Friday, with the fix itself now just short of the recent July 10th high of 7.1342. That said, this latest decision is in keeping with our long-standing view on both the likely actions of the Chinese authorities and CNY. We suspect that efforts to support the ailing domestic economy are likely to continue to be gradual, a view supported by the outcome of the recent third plenum, and this morning’s latest rate cut. The upshot is that the yuan trades softer to start the week, in keeping with our call for a managed grind higher for USDCNY towards 7.30, where we expect the PBoC to draw a line in the sand.
EUR
After last week’s ECB meeting proved a damp squib for markets, euro traders will be hoping that flash July PMIs this week will prove more informative. In our view, seasonal effects and political risk means that chances are skewed in favour of an undershoot on headline readings, an outcome that should help steer the ECB towards a September rate cut, with swap market-implied odds currently standing at just shy of 80%. Beyond the data, speeches by both ECB President Lagarde and Chief Economist Huw Pill are likely to be in focus, though given the minimal forward guidance on offer last week, we aren’t holding our breath for any meaningful guidance. If we are right, then this mix is likely to see the euro easing modestly, though cross currents from both China and the US are also likely to be a key factor in determining the single currency’s fortunes this week as well.
GBP
This week should be a quieter one for sterling traders, allowing time to digest last week’s dump of official data before the BoE delivers what is likely to be a finely balanced decision next week. That said, with markets currently projecting a 48% chance that the MPC cuts rates next Thursday, all data points in advance of the August 1st meeting are likely to be scrutinised with microscopic attention to detail. Chief amongst these should be the flash PMIs for July, not least given that the BoE has previously proven notably sensitive to PMI reports that are published just prior to policy meetings. We suspect that these should once again signal that the UK economy continues to outperform its European counterparts. Crucial for the BoE, however, will be any indication on whether or not there are indications of a pickup in passthrough from wages to prices charged, an outcome we think could tip the balance of risks further towards a hold from the MPC. If realised, this is likely to see the pound trade modestly stronger this week, though risks for sterling, like the BoE, look finely balanced in our eyes.
