FX Daily: USD to weather ECB meeting after BOC meeting

USD to weather ECB meeting after BOC meeting.
Philip Wee10 Jun 2021
    Photo credit: Unsplash Photo

    CAD gave back all of its gains after the Bank of Canada meeting. USD/CAD ended the session at 1.2110, literally unchanged from Tuesday’s close. BOC left its overnight rate unchanged at 0.25% and reiterated its pledge not to raise rates until 2H22 after it had fully ended asset purchases. In April, the central bank started to roll back its crisis measures by reducing its weekly pace of asset purchases to CAD3bn from CAD4bn. The guidance from the BOC suggested that it could stagger its taper every six months. Hence, markets may have been too impatient, not only  in expecting another taper in July, but also in discounting three BOC rate hikes and none for the Fed over the next 12 months. The odds remain higher for the CAD to depreciate above 1.21 per USD than it is to appreciate below 1.20. 

    The European Central Bank’s governing council takes place today. ECB President Christine Lagarde has been correct about the Fed hitting its inflation goal faster than the EU, and has commented that now was not the time to dial back its pandemic emergency purchase programme (PEPP). The EU recovery, while encouraging, presents its own challenges. The recovery is uneven across sectors and geography. Preserving favourable financing conditions via the PEPP (until its expiry in March 2022) has become a priority after the ECB’s assessment that corporate insolvencies could rise as EU nations lift their pandemic-related support measures. The ECB is not under any pressure to address the recent rise in inflation which German finance minister Olaf Scholz described as temporary. Brussels has also launched an “infringement proceeding” against the German Constitutional Court for last year’s ruling (which was later rescinded) against the European Court of Justice’s decision to approve the ECB’s bond buying programmes. For now, EUR may stop pushing above 1.22 and consolidate in a 1.21-1.22. 

    US CPI data today is expected to shape the debate over whether the Fed is patient or complacent over its dovish stance. Headline CPI is, as per consensus, expected to have risen to 4.7% yoy in May from 4.2% in April. Core inflation, which excludes food and energy, has been forecast to extend its rise above 3.0% to 3.5%, its highest level since the early 1990s. Yet, the US 10-year treasury yield fell yesterday to 1.49%, its lowest level since 3 March. To a great extent, the US bond market has been conditioned to misses in the last two nonfarm payrolls and the Fed tempering expectations after higher inflation prints. Except that this time around, the 10-year yield is teetering around a key support level marked by its 100-day moving average. Although the Fed has not changed its view that tapering asset purchases was not on the table, it appear less hesitant about starting discussions on the issue. Barring negative surprises in CPI today, next week’s FOMC meeting may well be the most important central bank meeting this month.

    Philip Wee

    FX Strategist - G3 & Asia

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