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Hobbled commodity currencies

Different strokes

There were three apparently inconsistent features to Wednesday’s FX market. First, the Covid caution, which had hobbled the commodity-related currencies on Tuesday, miraculously evaporated. Second, the GBP, USD, EUR, CHF and JPY were to all intents and purposes unchanged on the day against one another. Third, the CAD shot into the lead, adding an average of 1%.

The Loonie’s advance is easily explained. As expected, the Bank of Canada held its benchmark interest rate steady at 0.25% and announced an adjustment to its asset purchase programme. However, the nature and scale of that adjustment came as a surprise. Starting next week the central bank will reduce its weekly asset purchases to $3 billion, a 25% cut. A major factor in that decision was the bank’s upgraded forecast for the Canadian economy.

Ottawa’s “tapering” move is the first of its kind from a major central bank. Although the BoC said specifically that it will keep its benchmark rate unchanged “until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”, investors rewarded the CAD for the first step in that direction. It is a cent and a third firmer against the GBP.

 

Not much else

Aside from the Bank of Canada’s announcement there was almost nothing to attract investors’ attention. Inflation readings from South Africa and Canada were closely in line with forecast.

While South African inflation is above last summer’s 2.1% trough, it is well below the 4% - 7% range that it covered in the previous eight years. At 3.2% it is roughly in line with the last nine months’ levels. The rand is unchanged on the day. Canada’s inflation figures were overshadowed by the subsequent BoC statement but they would not have shone very brightly anyway. The headline rate of 2.2% was twice that of the previous month and almost exactly in line with expectations.

The lack of net change between the top-tier currencies would have been less remarkable had it not been for the distance they travelled along the way. The EUR lost and regained almost half a US cent, as did the GBP. Sterling gained and lost three quarters of a euro cent. As for Tuesday’s risk-off caution, there was nothing to explain why it disappeared so swiftly, but disappear it did.

 

ECB and PMIs

In the wake of the Bank of Canada’s tapering decision investors will inevitably be wondering if the European Central Bank might make a similar move today. It is unlikely to do so. Tomorrow begins with UK retail sales and moves on to the long list of provisional purchasing managers’ indices.

The key event for the euro today will probably not be the policy announcement at 1245h but the president’s press conference which begins 45 minutes later. Christine Lagarde is likely to be pressed on the question of when the ECB will consider its own tapering process.

Forecasts for Friday’s UK retail sales data indicate a monthly increase of 1.5%, which would put March sales 3.5% above the same month last year. With the provisional PMIs, analysts are guessing at 59 for Britain’s manufacturing and services sectors. They are pitching the equivalent EU readings at 62 and 49.1.

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