After a volatile week in FX, a little calm seems restored. Asian equities are a sea of light green and the dollar is mixed. This looks like the right response to news from President Biden that the US may look at a temporary tax holiday on gasoline. Looser fiscal policy could provide more room for central bankers to ride out the inflation storm with higher rates and a loose fiscal, tight monetary policy mix. Let's see how this gasoline tax holiday story develops and what size of fiscal stimulus it represents. For today, the US data calendar sees May existing home sales and Fed speakers. Existing home sales are expected to have softened again. Expect USD to trade well within the confines of last week's wild range.
Canada reports April retail sales today. The median forecast in Bloomberg's survey is for a 0.8% rise after a flat March report. The US dollar peaked before the weekend near 1.3080, a marginal new high for the year. It pushed lower yesterday and settled near 1.2980 and is approaching 1.29 to start the day. Steadier stocks and a modest rebound in crude should support the CAD in the short run at least. Domestic focus this week falls on Wednesday’s inflation report. CPI is expected to reach above 7% which will bolster conviction that the BoC will hike 75bps at the July policy meeting. Observe the USD/CAD chart.
EUR/USD is consolidating near 1.05 and is looking for a fresh catalyst. Some calm has been restored to European bond markets, where the European Central Bank's promise of a new anti-fragmentation tool seems to have been enough to restore confidence in peripheral bonds. Of interest today could be the eurozone current account release for April. In March this had fallen into its first monthly deficit since 2011. The seasonally-adjusted trade balance for April has already been released at a staggering EUR32bn deficit and a sharp widening of the current account deficit seems likely today. This should serve as a reminder that the eurozone's negative income shock on the back of the war in Ukraine has damaged the euro's fair value.
UK MPC member Mann grabbed headlines yesterday by suggesting that the BoE's failure to match Fed tightening could leave GBP/USD vulnerable and add to inflationary pressure in the UK. What to make of Mann's remarks? She was one of three voting for a 50bp hike at last week's BoE meeting and the fact that the BoE concluded its MPC statement by dangling the need for more forceful tightening suggests the majority may be leaning, just slightly, in her direction. Yet we know that a central bank cannot target inflation and the exchange rate at the same time and thus will not be blindly hiking more aggressively if cable were to break below 1.20.