Chief Macro Strategist
Summary: Comments from ECB member Guindos this morning suggest that rate lift-off for the ECB could occur as soon as July, helping to boost the euro. That seemed to impress the market far more than the debate between the two contenders in the French presidential election run-off, as the odd continue to widen in favour of the incumbent Macron, which also supports the euro. Elsewhere, CAD jumps on a hot CPI number.
FX Trading focus: The euro gets a strong boost from ECB comments, CAD jumps
In my last couple of updates, my focus was on whether the euro is set to jump early next week once the hurdle of the French Presidential Election run-off this Sunday is behind us. We have seen signs this week that the EURCHF is front-running the election result as odds widen in favour of the incumbent Macro after a few weeks of nervousness on Le Pen’s chances that have likely suppressed EURCHF’s upside potential (upside pressure on EURCHF is supported by the massive widening of yield spreads in the euro’s favour since early this year). Last night’s debate and consensus view that Macron won it have done little to alter the odds for Sunday – perhaps marginally improving his likely margin of victory.
The euro rallied this morning due to comments from ECB member Guindos, who argued in favour of a July ECB rate hike if the data are supportive. This has short EU yields back at the highs of the cycle as the market sharply raises the odds (now strong favourable) that July sees a 25 basis point hike and with more tightening out the curve. The market is even pricing better than even odds that we see a positive ECB rate by year end. As the comments are from Guindos, an ECB member that has historically been relatively neutral on the dove-hawk spectrum, the comments carry perhaps a bit more weight than usual.
Chart: EURUSD
We recycle the EURUSD chart from yesterday, with today’s rally adding to the sense that the pair is trying to post a reversal after rejecting the price action below 1.0800 recently, carried higher today far more by ECB comments that are raising anticipation of more and earlier policy tightening this year. The sharp backfilling of the move after the price action was taken well above 1.0900 is a bit of a disappointment for the bulls here tactically. Assuming Macron is set for a solid victory in the run-off election for French president on Sunday, it will be interesting to see whether that event risk moving into the rear-view mirror helps unleash more euro buying early next week, and how broadly (for example, only a bit of EURCHF upside or also EURUSD, EURGBP, etc.). A solid confirmation of the bullish reversal would be a move and close solidly above 1.1000, while the zone up to pivotal 1.1185 area (major cycle low once revisited before the Ukraine war) needs retaking to suggest a more structural shift to a bullish stance. Besides this weekend’s political hurdle in France, the next major event risk is the May 4 FOMC meeting. Interesting to note that the March 16 FOMC meeting saw a EURUSD rally attempt even as Fed expectations were adjusted higher in the wake of that meeting.
CAD jolted higher by stronger than expected CPI. The Canada March inflation level rose more sharply than expected, with the headline CPI measure printing +1.4% month-on-month versus 0.9% expected, and the year-on-year CPI at +6.7% versus 6.1% expected. The “Core-Trim” year-on-year measure was likewise at a new multi-decade high of +4.7%. The Canadian dollar rose sharply on the data as the market priced in more tightening from the Bank of Canada, which is now almost fully priced to hike by 50 basis points at all of its next three meetings, with the policy rate tightening continuing to outpace the Fed and at nearly 3.0% by year end. As well, Canadian home prices rose at an 18.4% year-on-year clip in March, matching the fastest pace of house price appreciation for the cycle. Inevitably, the monster rise in Canadian yields will tame housing over the next 12 months, but this will add to the BoC’s sense of urgency. USDCAD could yet get stuck again in this sticky 1.2400-1.2500 area if the USD isn’t selling off more broadly, or at least until after the May 4 FOMC meeting, which many are likely waiting for before making a decision on USD direction.
NZ Q1 inflation comes in slightly below expectations although still at the highest in over 30 years, with the year-on-year headline CPI at 6.9% versus 7.1% expected and the quarter-on-quarter rise at +1.8% versus +2.0% expected. The NZD was marginally weaker after spiking lower, with AUDNZD trading just shy of the key 1.1000 at one point before retreating.
Table: FX Board of G10 and CNH trend evolution and strength.
CAD is rising to the top of the heap, while CNH weakness remains notable, and the CHF downside momentum risks picking up after the French Presidential election run-off this weekend.
Table: FX Board Trend Scoreboard for individual pairs.
Outside of CAD, the commodity “overlay” is not performing particularly well, as gold is on the verge of flipping to negative, silver is already trying to do so today. Note the big move in EURCNH and USDSEK having a look at flipping lower on the resurgence in SEK we noted yesterday.
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