Good morning
Bank of Canada did indeed cut rates 25bps to 4.5% yesterday. Market impact was minimal, highlighting just how priced in the decision was in advance. I did wonder whether we’d see more movement during the press conference but as BoC Gov Macklem spoke, there was still little change. He said they are confident they can eventually get inflation to 2%, suggesting it could take until the end of 2025, but made it clear there was no predetermined path for rates. They are keeping a close eye on downside economic risks. USDCAD now 1.3835, helped by a mildly stronger USD overnight , GBPCAD 1.7820.
Otherwise the majority of currencies were stuck in familiar ranges. The US dollar weakened steadily through the day but not to any great extent, GBPUSD ticked up to 1.2920, EURUSD to 1.0855. We had had an odd bag of PMIs, the EU numbers were generally soft, UK were reasonable, particularly the manufacturing element which exceeded expectations, the services element missed expectations, while the US versions were the mirror image, with services better than expected and manufacturing worse. All in all, not much to grasp hold of and I don’t think we can really blame any market moves too heavily on these numbers.
Overnight a bit of USD strength saw both GBPUSD and EURUSD push lower, now 1.2885 and 1.0835 respectively, right on levels this time yesterday morning. A Reuters poll of economists suggests BoE will be cutting rates at its meeting on 1st August and will follow that cut with another later in the year. Meanwhile ex-Fed official Dudley made it clear he would back a Fed rate cut now, worried by some softer economic data. The S&P 500 dropped over 2% yesterday, its worst day since Dec 2022, suggesting all is not well. Other equity indices also saw losses, led by tech stocks which saw both Nasdaq and Japan’s Nikkei losing over 3%.
We had a surprise rate cut from China overnight which spooked the markets somewhat, they cut the MLF rate 20bps to 2.3%, the largest cut since the Covid outbreak back in April 2020. Gold also fell by over 2%, trading from $2,430 yesterday afternoon to $2,365 this morning. and the commodity currencies have been hit again, GBPAUD now up to 1.9725, GBPNZD to 2.1800.
USDJPY did have another leg lower, reaching 153.20 through the afternoon after having managed to creep back up to almost 155.00 in the morning, and then seeing further declines overnight which has taken us to 152.210. GBPJPY traded to 197.80 at one point yesterday afternoon, recovered to 198.80 overnight before that Yen buying kicked in and took GBPJPY back to 196.00 in the early hours of this morning, the lowest levels since mid-May.
I’d mentioned a couple of weeks ago how I’d quite like to start building a long-yen position but that with the forward points as they are it makes life difficult. It really comes down to timing. As it was, it looks like that would have been terrific timing, with GBPJPY now almost 1000 points lower. A boat well and truly missed.
We still think there is potential that Japan are involved in these bouts of yen buying. It is not like usual intervention, the moves are smaller for sure, but very consistent. However it is also clear that there is a ‘risk-off’ theme in the markets and it is possible that Yen is pushing higher in response to lower equities. Of course, there are also huge short yen positions that are certainly being unwound. Talk of another rate rise from BoJ next week is also adding to Yen strength, particularly when combined with the possibility of a Fed rate cut, although I do wonder whether the level of Yen now could give BoJ reason to keep rates unchanged again this time.
So, having had a few days of relative calm, things are hotting up. Todays US GDP release could add some volatility, while Japan inflation numbers overnight could well give reason for further Yen moves. I’ll have an eye on equity markets as well which look vulnerable to further losses.
Have a great day
- 09.00 German IFO
- 13.30 US GDP, core PCE, durable goods, initial jobless claims
- 15.00 US pending home sales
- 16.00 ECBs Lagarde speaks
- 00.30 Japan Tokyo CPI
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