Headlines

* RBNZ keeps rates on hold as weak economy dampens inflation  

* RBA to cut number of meetings that set interest rates to 8 a year

* USD slides, sterling hits 15-month peak, JPY below 140

* Bank of Canada likely to take more pre-emptive action and raise rates to 5%

FX: USD is falling for a fifth day in a row. We’ve haven’t seen that since mid-March. Strong support is at the year-to-date low at 100.82. The 2-year yield is lower again this morning and trading around 4.86%. The 10-year yield is trading below the key psychological level of 4% at 3.96%.  

EUR is benefitting from the soft dollar environment. The world’s most popular pair is trading just below the February top at 1.1032. GBP is making fresh 15-month highs today as it eyes 1.30. The hot wage data is making a 50bp rate hike by the BoE in August more likely. USD/JPY is continuing its recent pullback from 145. It now trades below 140 on speculation the BoJ will tweak its uber-dovish policy soon. AUD strengthened amid recent upside in commodity prices and a firmer yuan. NZD is in the green even though the RBNZ kept rates unchanged and refrained from any hawkish surprises. USD/CAD moved lower this morning ahead of this afternoon’s BoC meeting and rate decision.

Stocks: US equities eventually finished higher as investors await the CPI data. The benchmark S&P 500 closed firmer by 0.67%. The tech-laden Nasdaq finished up 0.49% and the Dow rose 0.93%. It closed just below long-term resistance at 34,281. Early weakness on the open was unwound late on with stocks catching a bid into a chunky buyside imbalance. The small-cap Russell 2,000 again outperformed.

Asian stocks were mixed with eyes on US data. The Nikkei 225 fell below 32,000 amid currency headwinds. Machinery data also disappointed. The Hang Seng saw mixed fortunes.

US equity futures are very modestly in the green. European equity futures are pointing to a higher open (+0.4%). The Euro Stoxx 50 closed up 0.7% yesterday.

Gold is rising again today as falling USD and yields help the non-yielding precious metal. Focus is obviously on US inflation data. The 100-day SMA at $1950 is initial resistance. The 50-day SMA is just above at $1957. Strong CPI data should push gold back down. The core monthly number could be the key.

Day Ahead – US CPI and BoC rate decision

Today’s main focus for markets will be the latest US inflation report. This is expected to see the headline print drop sharply to 3.1% from 4.0% in May. This would be the slowest rate of inflation since March 2021 and is primarily due to annual base effects. That is because hot CPI readings from June 2022 will now be dropping out of the 12-month calculation. It means unless we get a much lower than expected print, the focus should be on the core print which is likely to remain uncomfortably high around 5%. Eyes will be on the core monthly rate which is forecast to remain higher than the 0.2% that is needed over a prolonged period to bring the annual rate back down to the FOMC’s 2% target. 

The broader trend in the USD is soft and seems poised to remain so as markets start to factor in the likely peak in the Fed tightening cycle. A stronger set of data would upset this and see another 25bp hike get closer to a 50/50 bet by November. That would come after the baked in 25bp July rate rise.

Chart of the Day – USD/CAD regain bearish momentum

Markets remain cautious ahead of the BoC policy decision later today. While there is a clearer consensus in favour of a 25bps rate rise amongst economists, money markets only price in around 16bps. The job market remains tight and growth is resilient, though headline inflation is falling.

A hike should provide the CAD with some support though the overall reaction likely hinges on how the BoC characterises the policy outlook going forward. Last Friday’s sell-off in USD/CAD and subsequent bearish move lower is pushing the loonie towards the 1.32 zone ahead of the meeting this afternoon. There is strong support in the mid-1.31s with the recent cycle low at 1.3116.