The Morning Update

Wednesday June 12th, 2024

Written by:
Paul Harrison

The USD holds steady, oil prices rally, equity markets are up, and US yields are mixed ahead of US rates and inflation releases. The USD steadies after four days of gains as investors await today's US Federal Reserve interest rate decision and US inflation report. US Futures edged higher after the S&P 500 closed at another record high, and European equities rebounded after days of political uncertainty impacted investor risk sentiment. The Federal Reserve is expected to keep interest rates unchanged and update various economic forecasts. The US CPI is expected to hold steady y/y at 3.4%, while CPI ex Food & Energy is expected to ease slightly to 3.5%. Elsewhere, China's inflation held steady in May, while producer price declines eased, maintaining pressure for more stimulus to boost demand. Oil prices rally, supported by an IEA optimistic demand outlook. Bitcoin prices steady at $67.5k, while gold & silver prices edge higher. In focus today, US CPI, Fed Interest Rate Decision, FOMC Economic Projections, US FOMC Press Conference, BoC's Governor's Macklem speech, and also speeches from ECB's Villeroy & De Guindos will help provide intraday direction to currency markets today.

In other news. The G7 to call on China to stop helping Russia's war in the Ukraine. The National Bank will buy Canadian Western Bank for C$5 billion. The EU to impose tariffs of up to 38% on Chinese EVS. Hezbollah fires big rocket salvos at Israel after senior commander is killed. Hamas demands changes to the Biden ceasefire plan. The Philippines says China poses an 'existential' threat to the South China Sea. Russian barrage leaves Kyiv residents without power and water. France's conservative Republican party is fraying over the potential far-right pact. Finland saw its first NATO deployment as its jets joined a mission to Romania. Canada forecast hotter-than-average summer as peak wildfire season nears. The UK economy slows to a halt in April, bad timing for Sunak.

In currency markets. Currency markets are steady heading into the critical US interest rate decision and US inflation report. The CNY stalls at 7-month lows as data suggests more stimulus is required to boost China's economy. India's central bank supports the rupee from hitting a record low. The ZAR steadies as markets focus on unity government talks. CNY is flat, while Asian currencies firmed by 0.1% on average against the USD. Trading currencies are mixed, with MXN weakening by 0.5%, JPY & ZAR easing by 0.15%, AUD & NZD flat, CHF & SEK firming by 0.1%, and NOK strengthening by 0.2% against the USD.

In commodity markets. Oil prices rallied by 1.1%, Natural Gas prices tumbled by 1.9%, Gold & Copper prices firmed by 0.2%, Silver prices gained by 0.9%, Wheat prices weakened by 1.1%, and Soybean prices strengthened by 0.5%.

CAD stalls near two-month lows as investors are sidelined heading into a critical day for US data with both the US CPI & US interest rate decision. This is the first time in four years that the two critical data releases landed on the same day. Markets widely expect US inflation levels to remain steady, and the Fed will keep interest rates on hold. Heading into the US elections will make it more challenging for the Fed to adjust its interest rates, while at the same time, many economists expect up to three more rate cuts from the BoC in 2024. With the expectation of further rate cuts from the BoC, we anticipate the loonie has room to weaken further beyond 1.4000 heading into Q3.

EURCAD edges off June lows as political uncertainty eases following the EU election results on the weekend. We anticipate that CAD has room to weaken beyond 1.5000, with the expectation that the ECB will keep its domestic interest on hold while the BoC is expected to ease further into Q3.

EUR straddles 1.0750 ahead of the US Inflation & rates announcement. Investors are sidelined ahead of a possible volatile day as markets await the US Rates & Inflation reports. Domestically, the German Harmonized Index of Consumer Prices y/y came in as expected at 2.8% in May, unchanged from April. Investors anticipate that, with stubborn inflation levels, the EBC will adopt a wait-and-see strategy on interest rates, with many economists expecting the ECB to keep rates on hold until Q4. Today, if we see a print outside of expectations for the CPI report or any dovish sentiment from the Fed, we could see a significant increase in volatility in the currency markets.

GBPEUR holds 22-month highs on increasing interest rate divergence and investors favoring the GBP as a reserve currency. "Weaponizing a currency inevitably reduces its attractiveness and encourages the emergence of alternatives," Bank of Italy Governor and former ECB board member Panetta said earlier this year.

GBP sits on the sidelines near 1.2750 ahead of the US event double-header. The pound appeared to shrug off disappointing growth and output data as investors continued to sit on the sidelines ahead of the US inflation and interest rate decision. Domestically, the UK GDP in April hit zero growth, while industrial production fell to -0.9% and manufacturing production also weakened -1.4%, all weaker than expected and could increase the possibility that the BoE could look to ease earlier than expected into Q3. We anticipate the pound has room to weaken further against the USD if we see a break of 1.2670, which opens up the potential for a retest of 1.2500.