Limited price action likely ahead of next week

USD: Retail sales in focus ahead of next week

The US dollar is modestly weaker this morning but there is a real sense of lack of direction in the markets which may well persist throughout this week with no top tier data releases after today and a heavy calendar of key events next week with the FOMC, ECB and BoJ all meeting. China remains in focus but the weak economic data from yesterday is being offset by the hope and expectation of additional policy measures being announced to provide support for growth. The weaker real GDP print for Q2 yesterday has prompted a wave of forecast downgrades with the consensus appearing to shift from around 5.5% GDP growth this year to around 5.0%. Some further details on support for the consumption of household appliances were released but this had little impact on broader financial market conditions.   

The focus today will be on the data from the US with the retail sales data for June released along with industrial production. Retail sales are expected to have picked up modestly with autos helping lift consumer spending. But the outlook ahead we believe remains challenging with excess savings held by households close to being depleted while fiscal support measures have been removed and later this year consumers with student debt will restart servicing those debts. A study by the Federal Reserve recently concluded that pandemic-related excess savings had already been run down. The data today is very unlikely to have much bearing on expectations for next week when the FOMC will likely hike by 25bps. However, the fed funds futures strip currently has 140bps of rate cuts priced for 2024 and this will continue to weigh on US dollar performance.   

But equally, appetite for EUR buying may also be contained at these higher levels ahead of the ECB meeting next week. If there is any element of uncertainty over both the FOMC and ECB meetings next week it probably is more related to the ECB and to what level of conviction the ECB will provide guidance on a September rate hike. ECB Governing Council member Visco today expressed a view that inflation may come down faster than the ECB expects. If there are a growing number of GC members with that view, Lagarde could remain ambiguous in regard to a September move which could prompt some EUR correction given the rates market is close to 70% priced for a 25bp hike in September.

DXY VS 2-YR DXY-WEIGHTED SPREAD

Source: Bloomberg, Macrobond & MUFG GMR

CAD:  Maintaining top performer status

In addition to the US retail sales data today we have the Canada CPI data for June and after the BoC decision to hike last week, the impact of this CPI report will be more limited than if the BoC meeting was next week. Still, the data will be important in shaping rate expectations going forward given the BoC’s justification for the hike and more importantly given the guidance in the statement left open the possibility of another hike in September. While some economic data has shown resilience, we suspect the BoC is being overly optimistic and see risks skewed to the data coming in weaker than expected, which should limit the scope for CAD to outperform other G10 currencies as the US dollar weakens further.

The annual CPI rate is expected to slow to 3.0% (from 3.4%) YoY while the BoC core median and trimmed YoY measures are expected to slow to 3.7% and 3.6% respectively (from 3.9% and 3.8%). We see the risk over the coming months as being skewed to the downside relative to the BoC’s updated forecasts. The BoC pushed back the timing of reaching the 2% price stability goal by six months to mid-2025. This is based on the forecast pick-up to GDP from an average of 1.0% over the coming 12mths to 2.5% which seems highly optimistic to us. Inflation according to the BoC is set to hover at around 3.0% for the next year, again a bold call considering the building evidence of disinflation having further to run from here.

The OIS market only half-heartedly believes the BoC projections and the potential risk of another hike those projections imply. The rate market shows about 15bps of further tightening through to year-end and hence we would likely need a notable downside surprise to see short-term yields drop further.

For now with the momentum against the US dollar there seems a greater risk of further near-term declines in USD/CAD. The US retail sales data will be important here also as will broader financial market conditions. Perhaps just as important as the CPI print is whether the increased expectations of a soft-landing can persist. That expectation is equity market supportive and is a positive backdrop for CAD for now.

CAD / S&P CORRELATION HAS BEEN AT HISTORICALLY STRONG LEVELS

Source: Macrobond

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
US	13:30	Core Retail Sales (MoM)	Jun	0.3%	0.1%	!!!
US	13:30	Retail Control (MoM)	Jun	-0.3%	0.2%	!!!!
US	13:30	Retail Sales (MoM)	Jun	0.5%	0.3%	!!!
US	13:30	Retail Sales (YoY)	Jun	1.60%	1.61%	!!
US	13:30	Retail Sales Ex Gas/Autos (MoM)	Jun	0.0%	0.4%	!!!
CA	13:30	Common CPI (YoY)	Jun	5.0%	5.2%	!!!
CA	13:30	Core CPI (MoM)	Jun	0.5%	0.4%	!!!
CA	13:30	Core CPI (YoY)	Jun	3.4%	3.7%	!!!
CA	13:30	CPI (YoY)	Jun	3.0%	3.4%	!!!
CA	13:30	CPI (MoM)	Jun	0.3%	0.4%	!!!
CA	13:30	Median CPI (YoY)	Jun	3.7%	3.9%	!!!
CA	13:30	Trimmed CPI (YoY)	Jun	3.4%	3.8%	!!!
US	13:55	Redbook (YoY)	--	--	-0.4%	!
US	14:15	Capacity Utilization Rate	Jun	79.5%	79.6%	!
US	14:15	Industrial Production (YoY)	Jun	1.10%	0.23%	!!
US	14:15	Industrial Production (MoM)	Jun	0.0%	-0.2%	!!
US	14:15	Manufacturing Production (MoM)	Jun	0.0%	0.1%	!!
US	15:00	Business Inventories (MoM)	May	0.2%	0.2%	!
US	15:00	NAHB Housing Market Index	Jul	56	55	!
US	15:00	Retail Inventories Ex Auto	May	0.0%	-0.2%	!
UK	17:00	MPC Member Ramsden Speaks	--	--	--	!!!
NZ	23:45	CPI (YoY)	Q2	5.9%	6.7%	!!!
NZ	23:45	CPI (QoQ)	Q2	0.9%	1.2%	!!!

Source: Bloomberg