USD
The greenback continued its slide to start the week, with the broad dollar giving up almost 0.5% despite a light domestic data calendar. That said, these selloffs leave the greenback looking cheap to us. We favour fading any dollar slides, with the buck likely to retrace higher in the coming days. Markets continue to price a pace of Fed easing that looks unlikely outside a recessionary slowdown, even as both equities and the dollar are positioned for a soft landing.
Only one of these two outcomes can be true, with the dollar likely to rally on either outcome – either on a haven bid, or a paring of US rate expectations. Moreover, Chair Powell should clarify this point at Jackson Hole later in the week, a signal that we suspect markets will struggle to ignore. Before then, though, FOMC meeting minutes are the focus for today, and we would be surprised if they also fail to scan as hawkish relative to current market pricing. Admittedly, there may be an inclination to discount these as outdated, considering recent market gyrations. But we think they will offer a preview of commentary likely from Fed speakers later in the week, which should lead the dollar higher, if markets are willing to buy the message.
EUR
Yesterday’s 0.5% rally for EURUSD owed little to domestic developments. Rather, broad pro-cyclical sentiment helped the pair to climb, even as this leaves the single currency scanning as overpriced in our eyes. We look for the pair to retrace lower in the coming days, helped by hawkish Fed commentary, PMIs and Q2 negotiated wage data. All this may have to wait for a little, however, with a thin eurozone calendar in store today. Instead, the focus this morning is on Sweden, where the Riksbank will almost certainly ease policy at 08:30 BST.
The real question for traders is regarding the number of further rate cuts likely this year. We think a cut at every meeting looks most likely given that inflation is all but makes no difference back to target, while growth remains soft, as does the labour market. A hint in this direction would largely meet expectations that have built in favour of easing once per meeting over recent weeks – an outcome that should see minimal movement for EUSEK if realised.
CAD
Today’s CPI release should be the major event of note for loonie traders, even as we doubt that it will do little to derail the odds of BoC easing next month. The Governing Council has already signalled a willingness to look through any modest uptick in price growth, setting a higher bar for an inflation overshoot to derail the prospect of a 25bp September rate cut. Conversely, 50bps looks equally unlikely given the recessionary implications of accelerating the pace of easing, absent a sudden stop in price growth.
Neither outcome appears likely from where we stand. Instead, today’s data should show further modest disinflation progress, consistent with recent prints, though we also think there is room for a modest acceleration in BoC easing expectations later in the year to weigh on the loonie. With this in mind, and considering our dollar view, we think this leaves risks for USDCAD skewed to the upside this week, despite the pair’s 0.35% Monday rally.