USD
Tuesday saw the broad dollar climbing 0.15pp, despite a lack of domestic market catalysts. Granted, political uncertainties continue to loom in the background, but as we see it, yesterday’s move higher for the greenback came as traders continued to assess the shakeout from the conclusion of last week’s third plenum and the PBoC’s surprise rate cut to start the week. Both moves were underwhelming from an economic standpoint, suggesting a preference for incrementalism from Chinese policymakers that is unlikely to solve China’s current economic difficulties. Not only that, but the PBoC’s rate cut decision also signalled to markets that Chinese demand would continue to disappoint in the near future too. The result has been a broad weakening in currencies that are sensitive to Chinese economic activity and commodity prices, with AUD, NZD, and NOK standing out in this regard. Growth should continue to be in focus for traders today too as July PMIs provide an appetiser for traders heading towards tomorrow’s US Q2 GDP report. While we are below consensus in our view of US growth in the second quarter, suggesting some downside risk for the dollar on the horizon, today’s European PMI figures are likely to disappoint too, offering the prospect of tactical dollar upside today.
EUR
While the single currency also softened yesterday as markets continued to assess the outlook for Chinese growth, this morning sees euro traders turn their attention to economic activity at home. As we noted in our preview of today’s PMI figures, seasonal effects and lingering political uncertainty in France suggest that the balance of risks is likely tilted towards a disappointing set of prints. Admittedly, we think this does little for the ECB, with a modest undershoot relative to expectations unlikely to shift any views on the Governing Council when it comes to the prospect of a September rate cut. Even so, more signs of soft growth should weigh on the euro at the margin in our view, highlighting once again that there are better alternatives to the eurozone as a target for investment inflows.
GBP
Although we broadly expect this morning’s European PMIs to disappoint, we also think that the UK figures are set to be the exception once again. Consensus expectations look for a modest uptick in the composite PMI reading to 52.6, a 0.3-point increase on June’s print. We are inclined to agree, with fading political risk post-election likely to boost activity at the margin. However, the key point of interest will be buried in the report, with the MPC set to closely scrutinise today’s publication for any signs that passthrough from wages to output costs has strengthened. Indeed, BoE rate-setters have previously proven highly sensitive to PMI reports published shortly before rate announcements, with at least one such release last year seemingly a major factor underpinning a policy decision that surprised markets. As such, with odds of a rate cut at the upcoming meeting currently priced as a coin flip, an indication of increased wage passthrough would likely skew risks toward an August hold in rates by the MPC. If not, then we think the prospect of a rate cut next month remains on the table. The former outcome is more likely in our view, though our conviction on this is low, leaving risks for sterling two-sided today in advance of the UK PMI report being released at 09:30 BST.
CAD
Even as traders elsewhere in the world have growth in focus today, loonie watchers will be monitoring the BoC like hawks, with a rate decision set to be unveiled at 14:45 BST. We expect the Governing Council to cut rates by 25bps, taking the main policy rate to 4.50%, in line with broad market consensus. Indeed, anything other than a rate cut would fly in the face of economic reality as we see it. Growth remains weak, the labour market is unwinding, and inflation is well on its way back to target. Moreover, given this backdrop and recently announced efforts to stem immigration inflows, not only is it hard to see where the upside dangers to price growth could come from, but risks to the economic outlook appear increasingly skewed to the downside to us. That said, this view is not universally shared, with a handful of economists still looking for a hold in rate later today. As such, we think a decision to cut rates this afternoon could still see USDCAD trading modestly stronger, stabilising around 1.38 if the Governing Council meets our expectations.
