Global Themes

The U.S. dollar started a very big week mostly positive. The dollar underperformed against the euro but was broadly higher versus the yen, sterling and Canadian dollar while it sustained 16-month peaks against the Mexican peso. All eyes this week will be on the historic Trump-Kim summit due to get underway in just over 12 hours. The Fed is expected to use its midweek meeting to raise U.S. borrowing rates and signal whether it expects to raise rates another one or two more times this year. The ECB is not expected to change course on policy Thursday, but it could indicate whether it’s on track to end its monthly bond buying stimulus by year-end. Global stocks were mostly higher Monday on hopes for a constructive summit between the U.S. and North Korea. Still, underlying sentiment remained fragile after a tumultuous conclusion to the G-7 meeting that did nothing to allay worries of a global trade war.

CAD

Canada’s dollar held near March lows as the weekend G-7 summit did more to increase rather than quell concerns about a U.S.-Canada trade war. Downside for the loonie has proven somewhat limited so far as the market focused on the bright side of mixed northern jobs data Friday. While Canada shed jobs for a second straight month in May, unemployment remained at a low 5.8% and wages rose, factors that kept expectations of a Bank of Canada rate hike on July 11 elevated. Interest rate futures are pricing about a 68% chance of a rate hike next month to 1.50% from 1.25%.

MXN

The peso kept on the defensive around February 2017 lows against the greenback. The peso has largely served as a barometer of NAFTA negations with its underperformance a sign of heightened uncertainty over the outlook for the trade pact. The recent rout in emerging markets also reflects high expectations for the Fed to raise U.S. interest rates this week and keep the door open for more increases over the balance of the year.

USD

The dollar was mostly positive ahead of the historic Trump-Kim summit due in less than 12 hours and ahead of high stakes announcements from the Fed Wednesday, ECB Thursday and the Bank of Japan Friday. Market odds show a more than 90% likelihood that the Fed will announce at 2 p.m. ET Wednesday a quarter-point rate hike to a range of 1.75-2.00%. Critical for the dollar will be whether the Fed still expects a total of three rate hikes this year or should up it to four. A faster pace of rate hikes would bode well for the dollar, while a status quo message would leave it vulnerable

GBP

Sterling neared a one-week bottom after disappointing U.K. data didn’t help the flimsy case for the Bank of England to raise interest rates from 0.50% this year. U.K. factory growth unexpectedly contacted with one reading posting the biggest drop in over 5 years. Britain’s trade deficit widened unexpectedly to more than £14 billion in April which put a headwind on second quarter growth. More U.K. data to follow this week with unemployment due Tuesday, inflation Wednesday and consumer spending Thursday. 

EUR

On a two-week winning streak, the euro remained firm and in sight of multiweek peaks. The euro has enjoyed a short-covering rally as political uncertainty in Italy has all but evaporated. Meanwhile, hints from the ECB that it might use its June 14 meeting to signal an end to stimulus later this year also worked in the single currency’s favor. While short term sentiment has brightened a bit, the euro may not be out of the woods, particularly if the ECB should stop short of telegraphing a firm stop for stimulus by year-end or if area data should disappoint and argue against the central bank curtailing stimulus any time soon. Germany’s ZEW survey of investor optimism, due Tuesday, is expected to weaken further from 5 ½ year lows. 

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