Headlines

*RBNZ hikes by 50bps to 2.5%, appropriate to continue to tighten policy

*Bank of Korea joins jumbo hikers as inflation fight heats up

*BoE’s Bailey pledges to bring UK inflation back down to 2% target

*US CPI poised to hit four-decade high, boost 75bp hike bets

USD posted another fresh cycle high at 108.56 before easing off in the US session. A small “doji” candle printed denoting some indecision. EUR/USD briefly breached parity earlier in the day before bouncing. GBP/USD dropped to 1.1808 before rebounding to close largely unchanged at 1.1885. USD/JPY was softer helped by generally lower yields. AUD closed higher at 0.6757 while NZD hovers above the low of 0.6097 after the RBNZ hiked rates as expected this morning.

US equities extended losses ahead of the latest US CPI report and Q2 corporate earnings. The S&P500 closed lower by 0.92% and the Nasdaq by 0.97%. Treasury yields continued to move down. The closely watched 2-year/10-year yield curve remained inverted and hit its lowest level since 2007. Asian stocks have made small gains, snapping two straight days of losses. US futures are marginally in the green.

Market Thoughts – US CPI ahead

It’s the biggest risk event on the calendar these days, even though the Fed’s preferred inflation measure is the core PCE data. Markets await the release of US inflation for June. Economists polled by Reuters expect an acceleration to 8.8% on annual basis. The monthly number is forecast to rise one-tenth to 1.1%. The core reading, which excludes volatile items like food and energy, is set to remain unchanged at 0.6%. The core annual figure is expected to slow marginally to 5.7% from 6%.

A high inflation print will bolster the need for the nailed-on 75bp rate hike by the Fed at its meeting later this month. Front-loading and inflation-fighting credibility is key for policymakers, even if this pushes the economy into recession. Yet there are signs price pressures are slowing with softness in oil and commodity prices perhaps pointing to a peak in inflation. That said, the core data is still set to remain sticky and relatively elevated.

Chart of the Day –USD/CAD in the crosshairs

It should be volatile later today as we get the Bank of Canada rate decision 90 minutes after the US inflation data. Consensus is unanimous in expecting a 75bp rate hike. But money markets are rather more undecided and price in around 86bps, so half of another quarter point. A continued pledge to be data dependent with a view to returning the 1.5% current rate to the upper end of the 2-3% neutral rate range or above as soon as possible is predicted.

CAD remains the best performing major currency year-to-date after king dollar. Strong economic growth, yields and the commodity backdrop have helped the loonie. But the short-term outlook remains challenging given the global economic slowdown. USD/CAD has major resistance around the May, June, and July tops at 1.3076/83. Support is 1.2933 and 1.29.