Plenty To Ponder
Friday’s US jobs data arguably shouldn’t deter the Federal Reserve from its current course. Friday’s assertive action by the Bank of Japan to push-back against a rise in 10-year JGB yields should have reminded traders that while other central banks are becoming hawkish, the BOJ is not. Traders can draw their own conclusions about the implications of that for prospects for the yen (USDJPY) but it’s probably fair to say that yen bears are currently finding it easier than yen bulls to make a case for their view. Elsewhere the Bank of Canada (BOC) meets on Wednesday with the market anticipating a hike. The Canadian dollar (USDCAD) has already risen in anticipation. Indeed as Canada’s Scotiabank noted, on Friday, two-year [Canadian] yields are up 40bps and the [CAD] up 5 cents versus the USD compared to levels seen “just before the [BOC’s] Wilkins speech on June 12th” that set the ball rolling for a possible BOC hike. Switzerland’s UBS notes that “following the recent hawkish shift in the BOC, the market has moved to price two rate hikes by year-end.” UBS doesn’t “see value in chasing CAD strength as we believe a fairly aggressive hiking path is already in the price.”
It remains to be seen if the market concurs with that view. As for the pound (GBPUSD, EURGBP) traders may be focused more than usual on this Wednesday’s UK jobs data. Lloyd’s Bank is forecasting “a fall in the unemployment rate to 4.5%, which would be the lowest level since the 1970s and around the level the BOE believes is the ‘equilibrium’ level, below which wage growth accelerates.” While Lloyds Bank notes that as yet “there is scant sign of any pickup in [UK] wage growth,” the British firm makes the point that “as expectations around a near-term UK rate hike continue to build, developments in the labour market will have a key bearing on the MPC’s thinking.” Canada’s Bank of Montreal thinks a UK rate hike is imminent. “We still expect a rate hike in August, given the abrupt change in [BOE] Governor Carney’s words and the near 50-50 split within the committee. But, it will likely be a one-and-done, just to reverse last year’s emergency cut.” All in all, there’s plenty for traders to ponder as the new week begins.
Written by Neal Kimberley, External Currency Analyst.