Daily Brief

Inflation and the BoC

A busy day ahead for markets

After a period of relatively low keynote events and market-busting economic data releases, the business end of the week really gets going through today. We have already seen a 50bps rate hike from the RBNZ whilst most of us were sleeping, as well as German and (about to get) Spanish inflation (see below). Before the day is out, the latest U.S inflation reading, another probable hefty rate hike from the BoC, as well as a slew of other bits that matter, will all be released and digested by markets. Phew.

The defence of parity

There has been much fanfare around EUR/USD slipping to parity over the past few days. So far, the pair has just about held above, with some resolute defending that would grace any German football team, helping to keep the greenback at bay. The low yesterday may have actually been 1.0000 – depending on which data provider you evidence, but as of yet, there has been no fanfare or even fireworks below. Of course, given that we are only 30-50pips or so above, there is every chance that markets might look to challenge a break again over the coming sessions. We wait with baited breath.

The dollar, in detail

Currencies have been fairly volatile so far this week, and aside from the shenanigans in EUR/USD, there have been some noteworthy moves amongst the majors. GBP/USD moved as low as 1.1800 around the same time as EUR/USD was challenging parity, but had clawed its way back above 1.1900 by the European close. Whilst there is much attention on the Tory leadership contest, as of yet, markets are only in observation mode. An unexpected bump higher in UK GDP (MoM/May) of 0.5%, as well as some solid Manufacturing data, has boosted the pound further this morning. USD/JPY slipped back to around 136.50, having moved close to 138.00 the day before. Overall, the dollar index declined slightly on the day, but not materially so.

RBNZ deliver, as expected

The RBNZ have just raised interest rates in New Zealand by 50bps, to 2.5%, in a widely expected move. In their accompanying statement, the RBNZ said that the ‘committee noted that while there are near-term upside risks to consumer price inflation, there are also medium-term downside risks to economic activity’. That last bit (on economic activity) probably dampened the short-term profile for the Kiwi, with NZD/USD dipping back toward 0.6100 on the news, despite the RBNZ expecting to hike NZ rates further down the road.

German inflation

The latest German inflation reading, which has also just been released this morning, has seen headline inflation (YoY/June) maintain last month’s reading of 8.2%. Whilst the news was hardly good, the fact that there has been no material increase, may help to boost sentiment. Spanish inflation is out later this morning, and is expected to remain above the nasty 10% level.

U.S inflation

This afternoon’s (June) U.S CPI inflation report is about as big as they get just now. Fresh from another bumper labor market report, if the Fed see a consistently strong inflation reading, it seems hard to expect them to make any changes to the 75bps hike expected later this month. The actual report is a little tough one to call. On the one hand, surging energy prices dictate that the headline (YoY) inflation could push higher from 8.6% to 8.8%. However, take those nasty food and energy bits out, and weaker consumer demand may see the ‘core’ reading drop from 6% to 5.8% (YoY) on the headline. What matters most? Probably core if you are pushing us for an answer, but any decline across the entire report would likely be well received by markets.

75bps from the BoC, we thinks

Today’s Bank of Canada meeting is likely to conclude with another big rate hike, as the BoC go hike-to-hike with the Fed, and up steaks to the magic 75bps level. That would represent the largest such move by the BoC since back in 1988. Much like in the U.S, the economy is holding up better in Canada than in many cases elsewhere, benefitting from those strong commodity prices, even if there has been a marked slowdown in the housing market, as a response to those increased borrowing costs. It will be interesting to see the reaction of the Loonie. Against the dollar, there has been recent weakness, which is to be expected, however, the broader Loonie has held up much better. GBP/CAD has been under 1.5500, and EUR/CAD is nearing 1.3000.

 

What else is happening today?

EUR – Industrial Production

USD – MBA Mortgage Applications, EIA Crude Oil Stocks Change, Fed’s beige Book, Monthly Budget Statement

GBP – RICS Housing Price balance

JPY – Foreign Bond Investment, Foreign investment in Japan.

AUD* – Consumer Inflation Expectations, Employment Change, Unemployment Rate

*Data will be published in the early hours of Thursday

 

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