Yesterday was another good day for global equities which left the dollar quite vulnerable, particularly against the pro-cyclical currencies. The strength in equities seems to suggest that position-squaring is behind this week’s dollar weakness, and we expect the dollar’s positioning now to have reached a somewhat more balanced level which can allow for some stabilization. Today, markets will focus on US ADP employment figures, with consensus estimating a material deceleration (from 800k to 180k) in January. The ability of ADP numbers to predict the actual payroll figures is not very high and given that markets are already expecting some unexciting NFP jobs data on Friday, we think the impact on the dollar of today’s release should be quite contained.
The loonie’s slightly overbought condition (is likely behind the quite contained recovery in the currency compared to other commodity currencies. Incidentally, oil prices have proven resilient, but CAD cannot currently count on a strong rally in crude as it did earlier in January. That said, rate differentials continue to offer a bullish argument for the loonie, and markets are currently pricing in six BoC rate hikes in 2022, even though the Bank refrained from hiking in January. This may be a key topic in today’s Senate testimony by the Bank of Canada Governor Tiff Macklem, as policymakers may question whether the Bank is doing enough to fight inflation. Hawkish comments by Macklem may both consolidate markets’ view around six hikes in 2022 and fuel speculation about a 50bp move in March. We think that the aggressive BoC tightening cycle will provide some substantial support to the loonie this year, and we expect a move below 1.25 by the summer.
The latest CPI data has provided some support for the EUR and EUR/USD has remained quite bid now eyeing the 1.1300 level. This is a level that could indeed see some resistance and we are inclined to think EUR/USD will remain in the 1.1250/1.1300 area into tomorrow’s ECB meeting. Most continue to suggest that the euro will remain a bid in the short term after the strong German CPI numbers on Monday and we expect President Lagarde to keep showing patience on inflation and tightening.
GBP pared Monday’s gains yesterday. GBP/USD is currently trading at 1.3570. Today, the calendar is very light in the UK, and a wait-and-see approach ahead of a 'super-Thursday' for the two major European central banks could keep GBP mostly range-bound against the USD and the EUR.
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