Daily Market Pulse

USD

The Dollar sank to the day’s lows amidst an action-packed morning in the US and Europe, highlighted by the ECB’s latest interest rate decision and US retail sales.

US retail sales for May 2023 increased by 0.3%, surpassing the expected decrease of 0.1%. 

The control group, which excludes volatile sectors, also showed a 0.2% increase, in line with expectations, indicating continued strength in consumer spending.

Meanwhile, jobless claims came in at 262K, surpassing the estimated figure of 249,000. However, the 4-week moving average for continuing claims decreased by 6K from the previous read.

Finally, markets are still digesting yesterday’s comments from Fed Chair Powell, nixing the idea of rate cuts in 2023 and likely even 2024.  According to their revised dot plot, the Fed is projecting at least another 0.5% of rate hikes this year, while three committee members felt even more were needed.  The odds of a rate hike in July rose above 0.7% this morning, although Powell was non-committal on a July hike.

EUR

The Euro is surging higher this morning after the ECB delivered its much-expected 0.25% rate hike this morning – its eighth-straight hike over the last year and its fastest tightening cycle ever.

With the move, Eurozone interest rates now sit at their highest level since 2008, but the ECB doesn’t appear to be done yet. Markets are pricing in another 0.25% hike from the Bank in Q3 as the bloc continues to battle inflation, which has shown signs of improvement but remains well above the ECB’s target. However, with growth sputtering across the Eurozone, the capacity for further rate hikes in Europe may be limited as some of the bloc’s biggest economies, including Germany and Netherlands, have already entered recession.  

Earlier this morning, France’s CPI data for May showed inflation fell to a 26-month low in the bloc’s second-largest economy but remained elevated at 5.1% year-on-year. In addition, core-CPI came in at 5.8%, its lowest in four months. 

GBP

The Pound is flat today after reaching its highest level since April 2022 yesterday as April’s GDP print helped fuel bets of more rate hikes on the horizon in the UK. 

With the British economy posting 0.2% growth in April, avoiding recession, markets expect the Bank of England will push their benchmark interest rate as high as 5% by August, begging with another 0.25% hike next week.

With the UK calendar relatively empty for the next few days, GBP traders will shift their focus to next Wednesday’s UK inflation release for May – the last look at inflation before the BoE steps to the plate a day later.  Given how high UK inflation has been, it would likely take an incredible downside surprise in the CPI to keep the BoE from raising rates again next week.                       

JPY

The Yen fell to a seven-month low this morning following the Fed’s decision indication of two more rate hikes by year-end.  Given the BoJ is expected to maintain its ultra-accommodative monetary policy, the interest differential between the two nations looks set to widen even further – weighing on the Yen.

The drop in JPY caught the attention of Japanese government officials, with Chief Cabinet Secretary Hirokazu Matsuno noting that volatile currency market movements are undesirable and emphasizing the government is ready to “take appropriate steps if necessary.”

On the data front, Japan’s trade deficit decreased in May, with exports rising by 0.6% year-on-year while imports declined by 9.9%.  Despite narrowing the gap, Japan’s trade deficit has persisted for 22 consecutive months, marking the longest streak since 2015.                                

CAD

The Loonie is slightly lower this morning, pulling back from yesterday’s four-month high after the Fed’s hawkish hold and pullback in oil prices.

Given the economic importance of the US to Canada as a trading partner, further Fed tightening would put even more pressure on the US economy and, in turn, weigh on Canada’s growth prospects.  USD/CAD traders will now be even more sensitive to economic data from both countries over the coming months to analyze the impact of higher-for-longer rates in their respective economies.

Meanwhile, housing starts in Canada declined by 23% in May, with a decrease in both multi-unit and single-detached urban starts, missing market expectations. 

On the bright side, manufacturing numbers were also released today, with manufacturing sales growing by 0.3% in April versus expectations for a 0.2% decline.     

MXN

The Mexican Peso is retreating this morning, down over 0.7% after breaking through to a fresh-seven-year high yesterday.  

The Fed’s dot plot indicated at least two more rate hikes are on the table for the US in 2023, which weighed on the Peso and its LATAM counterparts that have thrived on high interest-rate differentials against the Dollar.  

Meanwhile, Mexico’s central bank has already committed to holding rates steady for June, so MXN traders will be eager to see next week’s inflation data out of Mexico to help anticipate any potential monetary policy changes from Banxico heading into Q3.      

BRL

The Brazilian Real is on the back foot this morning as it seeks to hang on to the one-year high claimed yesterday.  Despite today’s pullback, BRL is still over 8% higher against the Greenback this year amidst a broader rally in LATAM currencies.

Earlier, S&P Global Ratings revised Brazil’s credit rating outlook to ‘positive’ while maintaining the debt grade at BB-.  The agency attributed this positive outlook to improved expectations for economic growth and increased confidence in the country’s stable fiscal and monetary policies.

With the economic calendar effectively going dark over the coming days, the Brazilian Real’s moves will likely be primarily Dollar-driven until next week’s interest rate decision from Brazil’s Central Bank, where they are expected to hold rates firm.   

CNY

The Yuan is bouncing back this morning after falling to fresh six-month lows overnight after the PBoC cut its medium-term lending facility rate by 0.1% - its first such cut in 10 months.  The move follows the Bank’s decision to decrease short-term lending rates by 0.1% two days ago, and many expect similar action on China’s benchmark rates next week.

 

Meanwhile, China’s retail sales grew by 12.7% year-on-year in May, missing expectations of a 13.6% rise and less than the April read but still posting the fourth consecutive month of growth.  In addition, China’s industrial production grew by 3.5% year-on-year in May - the 13th consecutive month of growth but slightly slower than expected.