FX markets are calmer today after Monday's wild ride. That ride was largely caused by a re-appraisal of China, where spreading lockdowns and a drop in the renminbi spread panic through the FX market. That panic has subsided a little after Chinese policymakers overnight promised to deliver more monetary support and to speed up its review of the big tech/platform economy. The market now awaits the outcome of the quarterly Chinese politburo meeting over the next few days to see what concrete stimulus measures actually emerge.
For today, we are interested to see whether US data like consumer confidence has any impact on Fed expectations. Last week's raft of poor consumer data in the UK dented Bank of England tightening expectations and saw sterling crumble. Will today's release of April Conference Board consumer confidence have any impact on the pricing of the Fed cycle? We suspect not. The USD may now be due some consolidation but the trend towards a stronger greenback remains intact.
Despite the drop in crude oil prices and a risk averse tone in markets, the CAD remains one of the less affected G10 currencies against a growingly stronger greenback. The CAD’s steep weaking from the mid-1.24s just last Thursday to current levels about three cents higher may be resulting in a slowing of gains. Meanwhile, the CAD’s prospects with a steep hiking cycle expected from the BoC make it a standout among most of the major currencies and we think current levels fail to reflect the support of hawkish BoC policy that should result in a stronger CAD in coming weeks and months. Markets are pricing a move at each of the Jun, Jul, and Sep meetings. Today we see the Canadian wholesale trade data which likely fell 0.3% in March from February, largely driven by lower sales in the machinery, equipment and supplies subsector, that said, this should not have any impact on the CAD.
Monday's sell-off in European equities triggered a sharp adjustment in European Central Bank tightening expectations. The ECB debate over whether it hikes 50bp, 75bp or 100bp this year is being rather swamped by the potential 250-300bp adjustments to be made elsewhere in the world. Developments in Ukraine are also at a dangerous phase. Russia now seems to be targeting Western military aid for Ukraine more directly with attacks on rail infrastructure, questioning whether attacks move closer to the border with NATO partners. Escalation is clearly a risk. For today, however, EUR/USD can consolidate in a 1.07-1.08 range before making a move towards the March 2020 low at 1.0635.
Sterling continues to trade on a fragile footing after some consumer data put a dent in the Bank of England (BoE) tightening story. Most now feel that GBP/USD has to test 1.2500, and 1.2850 will now act as strong resistance - should it get that high. Tightening expectations for the 5 May BoE meeting have dropped. However, by December, Bank Rate is still priced at 2.17%. One of the key stories this year will be whether central banks push ahead with tightening even as growth slows - until the BoE waves the white flag on the rest of its tightening cycle, it may be too early to write off the GBP.
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