Global Themes

The U.S. dollar eased off highs for the year ahead of an events-laden day ahead. The dollar pared gains against the euro and yen, fell to its lowest in more than two weeks against the Canadian dollar, but rebounded from an overnight fall against the U.K. pound. Sterling turned a gain into a loss after the Bank of England left borrowing rates unchanged at 0.50% and signaled very limited scope to raise them over coming years. On the U.S. side of the pond, focus today will be on U.S. consumer prices. Forecasts call for inflation to extend an uptrend, a scenario that if realized would bode well for the Fed to raise interest rates, one of the chief catalysts behind the dollar’s nearly 5% surge from April lows. Commodity currencies went their separate ways as the loonie enjoyed an oil-inspired bounce, but the kiwi and Aussie dollar held near 5- and 11-month lows, respectively.

JPY

The yen favored the bottom of its range against the dollar as U.S. Treasury yields held near multiyear highs. Juicer American yields, with the 10-year keeping near 3%, the highest in years, are notorious for attracting Japanese investors given the paltry, subzero rate of return that the world’s No. 3 offers. Still, downside for the safer bet yen could prove limited given USDJPY’s struggle to decisively break a key psychological level and how geopolitical uncertainties continue to flare in the Mideast and elsewhere.

CAD

A rollercoaster week has seen the Canadian dollar swing from multiweek lows to multiweek peaks. The loonie scored a 2 ½ week high as higher oil markets offered support. The loonie has also served as a barometer of NAFTA negotiations this week in Washington with its rise signaling cautious optimism in officials hammering out an agreement that keeps the trade pact alive over coming years. Trade is a critical cog of the Canadian economy which sends around 75% of its exports south of the border. Canada’s jobs report lurks Friday, a survey that often stirs USDCAD volatility. Forecasts call for unemployment to hold at a four-decade low of 5.8% in April.

USD

The dollar moved further from its yearly peaks after data showed a lukewarm rise in inflation, suggesting the Fed would stick to its script of gradual rate hikes. Consumer prices rose at an annual rate of 2.5% in April, meeting forecasts. Core inflation, which is less volatile, held steady at 2.1% compared to forecasts of 2.2%. Weekly jobless claims were consistent with a strong job market, printing for a second straight week at 211,000, the lowest in 5 decades. While down on the day, dips in the dollar could prove relatively short-lived given how sentiment has materially brightened, suggesting pullbacks could give way to renewed buying.

GBP

Sterling rode an overnight rally to one-week peaks but reversed course after the Bank of England left its key rate unchanged at 0.50% while it sketched a decidedly slow and gradual path for future rate rises. Most officials (7-2 tally) voted to keep lending rates low. The bank’s new forecasts for the U.K. economy came with downward revisions for inflation, growth and wages. Officials see unemployment trending a little lower in the years ahead. The bank said it wants to wait and see the extent to which the economy has moderated before raising rates. As for its rate outlook, the bank forecast an average of a single, quarter-point increase over the next three years, which contrasts forecasts of a hat-trick of U.S. rate hikes this year alone. Given the divergent policy paths between the U.S. and Britain, sterling’s defensive bias appears intact for now.

NZD

The kiwi dollar sank to five-month lows after New Zealand’s central bank left interest rates unchanged at 1.75% and signaled an even chance of the next move in rates being up or down. Today’s meeting of the Reserve Bank of New Zealand marked the maiden one for new Gov. Adrian Orr. While Mr. Orr sounded an overall upbeat note on the health of the economy, he also acknowledged how inflation continued to run chronically low, a scenario that if sustained could allow cover for policymakers to slash rates in the months ahead. 

EUR

The euro edged up from 4 ½ month lows as the dollar buying spree over recent weeks slowed ahead of a critical look at the health of the world’s biggest economy. Given the euro’s decidedly weaker bias of late, bounces in the single currency could give way to renewed selling at better levels. Next week looms large for the euro with big ticket data due on quarterly growth and inflation.

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