FX Update: BoC first to join Fed in hiking rates — #SaxoStrats

The US jobs report Friday did little to change the plot. Strong nonfarm payrolls together with a solid upward revision of previous data pushed back fears that payrolls growth is slowing, while weaker-than-expected average hourly earnings growth fuelled expectations that the US Federal Reserve will hike less than it says it will over the coming 18 months. On that note, the market’s view of the Fed’s stance faces an interesting test this week as Fed chief Janet Yellen will testify before both houses of Congress – delivering the semi-annual Humphrey Hawkins testimony. 

Despite the weak earnings data in the jobs report, US yields finished last week on a strong note, as did their European counterparts. It has emerged that the European Central Bank is buying fewer core EU bonds than it is allowed to buy under the capital key for allocating purchases, and this has resulted in a back-up in core EU yields, with German long yields at new highs since the beginning of 2016.

The G-20 summit came with a noteworthy meeting between US and Russian presidents Trump and Putin, who agreed to enforce a partial ceasefire in Syria and made a bizarre promise to work together on cybersecurity. Otherwise, the summit produced a weak communique that couldn’t hide the US isolation on key issues, particularly the Paris climate deal.

Canada’s central bank will hike rates by 25 basis points to 0.75% on Wednesday, its first rate hike since 2010 and making the Bank of Canada the first central bank among developed-market economies to join the Fed in hiking rates. A strong Canadian June jobs report and June Ivey PMI released on Friday made this Wednesday’s move a virtual certainty. It is interesting to note, on a forward expectations basis, that Canada’s 2-year bond yield is some 40+ basis points higher than the expected policy 0.75% rate after this Wednesday, which means the market is looking for a further rate hikes to come beyond this week.

Triple divergence on the EURNOK chart is getting confirmed this morning, with stronger-than-expected CPI. This has us looking lower into the 9.30-35 area.

USD – the greenback was unable to get a signal from Friday’s mixed jobs report. This week, eyes on Fed chief Yellen and how her normally hyper-cautious rhetoric dovetails with the market’s sceptical assessment that the Fed will fail to live up to its own policy forecasts as has been the case for the last two years or more.

EUR – the EURUSD rally is hanging in there and now needs to progress higher after the 1.1300 pivot area to survive, or else it faces a long summer of consolidation in a lower range. Watching European yields with interest this week after the notable jump in German 10-year bund yields above 50 basis points.

JPY – the weaker yen on higher yields has been a reliable theme once again, particularly as risk appetite has witnessed the latest sharp yield rises without swooning. Prime minister Shinzo Abe is reshuffling his cabinet to deal with weak popularity ratings despite the strong Japanese economy. Cover your eyes on the potential for a JPY cross meltdown if/when the Bank of Japan ever blinks on its commitment to yield curve control.

GBP – sterling weakened back to the key 0.8850 area in EURGBP as the currency looks adrift amid the UK’s political isolation and risks of Brexit. EURGBP higher is the favoured way to look for further GBP weakness.

CHF – EURCHF is poised right at 1.1000 ahead of the weekly Swiss National Bank deposits – if global bond yields continue to rise, we’re not so sure that the weekly SNB sight deposits are all that meaningful and risk is higher for EURCHF into 1.1200+.

AUD – the market having a hard time generating interest in Aussie direction after a damp squib of a Reserve Bank of Australia meeting last week. Local bearish reversal in AUDUSD could set up further consolidation to the downside.

CAD – The loonie trades to the strong side on the anticipated rate hike this Wednesday. It will be easy for the Bank of Canada to disappoint with guidance, given how aggressively the market has repriced CAD.

NZD – AUDNZD and NZDUSD charts have the kiwi rally looking a bit tired – next event risks are next week’s dairy auction and CPI, both on Tuesday.

SEK – EURSEK is progressing lower and has room into 9.50 or lower as the foot-dragging Riksbank is unable to scare away the SEK bulls on valuation.

NOK – We have triple divergence in EURNOK (see chart above) after Norway’s June CPI came in above expectations today, which was no huge surprise given the very weak currency. There's considerable room for consolidation before we reassess.

— Edited by John Acher