USD: Commodities are generally softening and confirmation that the world economy is not a one-way recovery story comes from the news that the PBOC is considering a Reserve Requirement Ratio cut - to help lending for SMEs.
The FOMC minutes released last night demonstrated a calm and patient tone than many had expected. Yes, a substantial majority of members noted upside risks to their inflation projections but there was no suggestion that the Fed would be rushed into tapering, let alone tightening.
This begs the question - what next? Does the Delta-variant spread in the US and the last shoe to drop in the reflation unwind is an equity correction? We are a little more positive than that and would back growth in 3Q and a return to pro-cyclical currencies on any further near-term weakness. For today, the US focus will be on whether initial claims fall further, and we could actually see DXY handing back some of this week's gains.
CAD: The CAD has recorded losses and has cross the 1.25 threshold and is on the verge of crossing the 1.26 level in broad gains for the dollar. The CAD under-performed the vast majority of its key currency peers, with an added impact from weaker commodities and losses in equities. Most think the USDCAD should be trading closer to (and even under) the 1.20 mark on the basis of yields and commodity prices but broad market flows driving the dollar have proven too strong to resist. Next week’s BoC announcement is likely to inject some renewed bullishness into the CAD, as the bank deploys another QE pace reduction. It likely will not hesitate significantly with the yield on 10-yr Canadian government debt touching its lowest point since Feb 24 yesterday.
EUR: Today the ECB will release its monetary policy strategy view. This is akin to the exercise the Fed undertook last year and resulted in the Fed's Average Inflation Targeting framework. Reports widely suggest the ECB will adopt a quasi-symmetrical target - targeting inflation at 2% with occasional overshoots, rather than its current 'close to, but under 2%'. Like the Fed, an ECB preparing to run the economy hotter could point to lower EUR real rates and be negative for the EUR. For the time being, however, the markets price a very dovish ECB - no real tightening until late 23/24 - and today's announcement may not have a large impact on the EUR.
GBP: England's football success has yet to have any material impact on GBP - though the pair is staying reasonably bid against the EUR. Look out today for the BoE quarterly credit conditions survey - providing insights on lending volumes and credit spreads. It may be too early to expect lending volumes to have picked up. Current BoE pricing of the first 10bp hike in summer 2022 and the first full 25bp hike in March 23 feel about right - although could get pushed back a bit should the current unwind of optimism continue.
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