The US$ firms, oil prices rally, equity markets are up, US yields are higher in a cautious start to the week. Sino/US tensions remain high as US navy shows Chinese warship's 'unsafe interaction' near Taiwan. The US$ gains as US economic strength persists offsetting the of the Fed pausing in June. Oil prices climb as Saudi Arabia's pledges to cut output in July, and Euro stalls as Eurozone business growth slowed in May on a deepening decline in the manufacturing sector. This weeks key events: Monday US factory Orders, ISM Services, EBC President Lagarde, Tuesday Rate decisions in Australia & Poland, EU Retail Sales, Wednesday China forex reserve, trade, US Trade, Consumer credit, Canada Rate Decision, Thursday EUR GDP, Japan GDP, US Wholesale inventories, initial Jobless claims, Friday China PPI & CPI, CAD Net Change in Employment & Unemployment Rate.
In other news. Mexico's ruling party set to triumph in critical regional election. Turkey's new finance minister pledges return to 'rational' economic policy. IMF chief says there's no signifiant slowdown in lending and the Fed may need to do more-CNBC. Russia says it thwarted Donetsk large-scale offensive: Ukraine says it's moving forward into Bakhmut. Air travel to be distributed by 'very frustrating' supply chain issues, IATA's Willie Walsh says. Europe is struggling with precarious water situation ahead of another drought-riven summer.
In currency news. Turkish Lira weakens over 1% despite appointment of well-regarded finance minister. The US$ extends gains post Fridays strong jobs data amid the prospect of a Fed pause. CNY remains under pressure testing 6-month lows as investors fret over it's bumpy pandemic recovery. CNY falls 0.5%, while Asian currencies are down 0.3% on average vs US$. Trading currencies remain under pressure with MXN slipping 0.1%, CHF, NZD & JPY are down 0.2%, AUD weakens 0.35%, NOK & SEK tumble 0.8% while outlier ZAR strengthens 0.55% vs US$.
Oil prices rally over 1% on Saudi's plan to deepen output cuts by a further 1 million barrels per day from July to counter macroeconomic headwinds that have depressed markets. C$ slips off it's two-week highs in early trading despite improving commodity prices as investors shift their focus to Wednesday's BoC interest rate decision. We anticipate the Bank of Canada will keep rates on hold at 4.5%, with the focus being on BoC rate statement for any signs of a policy shift into Q3/23. Today focus will be on US ISM Services PMI to help provide intraday direction to currency markets.
EURCAD holds steady near 4-month lows as EU growth stumbles while CAD economy remains positive increasing speculation that the BoC may adjust their pause stance on Canada's future interest direction.
EUR remains under pressure below 1.0700 ahead of President Lagarde's speech. Euro remains on the back foot after a weakening manufacturing PMI data across Europe and EU Sentix Investor Confidence falling below expectations in June. While in the US its economic activity remains strong and markets remain cautiously optimistic heading into the Fed rate decision in June. Today ECB President Lagarde will speak at the hearing before the committee on Economic & Monetary Affairs of the EU parliament in Brussels. Lagarde is expected to reiterate her comments from last week that they need to continue to raise rates until they are confident that inflation will return to target. Alongside Lagarde's comments focus will be on US ISM Services PMI to help provide direction to currency markets today.
GBPEUR falls from 2023 highs as Euro gains on the cross ahead of today's ECB Lagarde's anticipated hawkish speech.
GBP breaks through 1.2400 amid a firmer US$. Higher US yields, Friday's strong than expected US jobs data sees investors repricing the prospect of the Fed potential pausing at its June meeting. Domestically the the BoE is expected to to raise rates by 25bps in June to 4.75% and see a terminal rate close to 5.5%. Focus will be on todays headline PMI data, if we see Services PMI over 50 could help the Fed maintain its hawkish outlook. We expect the pound to weakness could extend towards 1.2330 as momentum favors the US$ in the short term.
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