FX Update: Price action muddled after BoC, ahead of ECB

The Bank of Canada sent a more optimistic message than expected yesterday on when the Canadian economy is set to achieve sustained inflation above 2%, moving the timeframe from 2023 to the more specific second half of next year in yesterday’s press release. As this moves forward the anticipated conditions for when a rate hike is likely, the CAD reacted strongly, as did Canadian government bond yields, though by the end of the day, while most of the CAD move stuck, the yield move (looking at 2-5 year CGB’s) didn’t really do so, suggesting that the currency reaction may have a hard time finding follow through higher unless we are set for a strong new phase of risk sentiment and rising oil prices. As well, Governor Macklem made a lightly dovish pushback against on overall hawkish interpretations by indicating that just because conditions were there for hiking rates, that the Bank of Canada would necessarily hike rates immediately.  As well, the bank tapered asset purchases down to C$3 billion per week from C$4 billion, the first G10 central bank to accomplish a net tightening since the pandemic outbreak. One feature of the Canadian economy that is providing some further pressure is the Canadian housing market, which is already an absurdly large portion of the Canadian economy and private debt loads in Canada are some of the world’s highest. The latest March housing starts figure was beyond white hot at an annualized 335k, more than 50% above the average pace of the three years before the pandemic. And the March house price survey showed prices advancing 10.8% year-on-year (the fastest rise since late 2017) and the month-on-month figure was 1.5%. The 5-year rate that Canadian mortgages are based on has risen to about 1.1%, with all of the rise from the 0.6-0.7% range coming in February.  A massive housing hangover awaits the country somewhere down the line.

ECB meeting on tap later today. We have an ECB on tap for today, where we won’t look for much, but will look for any signs in the press conference that the division between the “hawks” and doves is growing on the guidance provided on PEPP purchases, an eventual tapering (ECB purchases seem excessive beyond this year if GDP forecasts are correct) and especially whether it is necessary to rush out and push back against rising yields every time the longer end of the curve is pressing a bit higher (but still only around 0% for the French 10-year and -20 bps for the German bund). ECB President Lagarde is the diametric opposite of her predecessor Draghi as she seems unable to deliver a coherent message and seems out of her depth at the press conferences.

Turkey – the Turkish lira is under considerable pressure again today after President Erdogan said that the country used $165 billion in reserves over the last two years (taking “net” foreign reserves to an estimated negative $60 billion) in a futile defense of the TRY. An FT piece this morning ($) talks about the increasingly raucous political opposition against Erdogan for the  “missing billions” Consumer Confidence took a bad dive in April (survey out this morning) to 80.2 from the prior 86+, likely on the huge new wave of Covid cases washing over the country. Adding some geopolitical risk into the mix is the Biden administration set to officially recognize the Armenian genocide of 1915-17 today ahead of an anniversary of the event on Saturday, a move likely to provoke a strong official response from Erdogan.

Table: FX Board of G-10+CNH trend evolution and strength
Choppy price action makes it easy to over-interpret the latest developments, but interesting to note that the gold trend reading is the strongest positive signal on the FX Board as the precious metal is outperforming fiat in a broad terms.

Table: FX Board Trend Scoreboard for individual pairs
AUDJPY continues to tease a cross-over, but needs an impulsive move lower for the actual flip to a negative trend to be meaningful (see chart above). Meanwhile, yesterday’s USDCAD smash-down spoiled the party for those looking for the recent cross to a positive trend to develop. The 1.2600-50 area in USDCAD is huge after the most recent price action if the sell-off there fails to stick.

Upcoming Economic Calendar Highlights (all times GMT)

• 1145 – ECB Rate Announcement
• 1230 – ECB President Lagarde Press Conference
• 1230 – US Weekly Initial Jobless Claims
• 2300 – Australia Flash Apr. Services and Manufacturing PMI 
• 2330 – Japan Mar. National CPI
• 0030 – Japan Flash Apr. Services and Manufacturing PMI