Now, It Is Canada’s Turn

Overview: US yields eased yesterday after the slightly lower than expected core CPI reading and “sell the rumor, buy the fact” type of activity. The jump in the 10-year yield today to 2.78% more than erased the decline. It has softened in the European morning to 2.74%. The yen tried to snap a seven-day decline yesterday but failed and the higher US yields have lifted the dollar to new 20-year highs against the yen. The weaker yen, in turn, seemed to help lift Japanese stocks. Most large markets but China and India rose in Asia Pacific trading. Europe’s Stoxx 600 is struggling, after falling Monday and Tuesday. European 10-year benchmark yields spiked 4-7 bp higher earlier today but are mostly 1-2 bp better. Following higher than expected CPI, the 10-year Gilt yield is up 5 bp. US equity futures are firm after yesterday’s wobble. The greenback is broadly mixed. The New Zealand dollar, where the central bank delivered a 50 bp hike, is off twice as much as the yen (1.0% vs. 0.5%). Among emerging market currencies, the South African rand is extending its gains for a fourth session and the Mexican peso is higher for the fifth day. The Israeli shekel is also extending its gains. It is gaining for the fourth session following yesterday’s 25 bp rate hike. Gold is pushing to new 4-week highs near $1,980. June WTI is firm. It jumped 6.6% yesterday to resurface above $100 a barrel. US and European natural gas prices are firmer too. Iron ore saw its first gain in six sessions yesterday but gave back the lion’s share today. July copper is flattish after yesterday’s 1.7% advance. July wheat is edging higher again after a three-day 8%+ rally.

Asia Pacific

Economists favored a 25 bp hike by the Reserve Bank of New Zealand but the swaps market favored a 50 bp hike (75%). The RBNZ delivered a 50 bp hike. It is the first time in more than two decades that the central bank raised rates by more than 25 bp. It called the move “the path of least regret.” The swaps market favors another large move next month (May 25). The New Zealand dollar initially jumped about half-a-cent on the news but met a wall of sellers near $0.6900 and has reversed lower to trade below yesterday’s low (~$0.6800).

China was surprised with a larger than expected March trade surplus. The median forecast in Blomberg’s survey was for a $21.7 bln surplus after a $30.6 bln surplus in February. Instead, on the back of stronger exports and weaker imports, the surplus rose to $47.4 bln. Exports rose 14.7% from a year ago compared with 12.8% expected. Imports fell (0.1%) for the first time since August 2020. A wide range of imports fell, and this seems clearly related to the Covid-related port and dock congestion in Shanghai and nearby areas. The distortions are expected to persist. China’s surplus with the US rose to $32.1 bln from $26.7 bln. The surplus with the EU rose to $20.1 bln from $17.8 bln. The surplus with ASEAN rose to $7,7 bln from $2.7 bln. These three areas account for the increased overall surplus. Note that China’s deficit with Russia rose to $4 bln from $1 bln, playing on fears that Beijing is assisting Moscow, which is increasingly being isolated.

Japanese officials repeated that rapid yen moves are undesirable but have said little about the level, and the market takes this as a sign to press ahead. The greenback poked above JPY126.35 in late Asian turnover. As we mentioned previously, a move above JPY126 opens the door to JPY130, and there is indeed more talk of JPY130 today. Support is seen in the JPY125.80-JPY126.00 area. In terms of the orderliness of the move, the upper Bollinger Band is around JPY126.60. The Australian dollar barely failed to record a bullish outside day yesterday but has come back offered today. The $0.7500 level capped it yesterday and now looks set to retest $0.7400. The greenback is firm against the Chinese yuan, but it is going nowhere quickly. For the sixth session, it is posting a net change of less than 0.1%, though for the second day it is making lower highs. The PBOC set the dollar’s reference rate at CNY6.3752, slightly higher than the median (Bloomberg survey) of CNY6.3747.

Europe

The news stream from the UK is not pretty. Both the Prime Minister and Chancellor of the Exchequer Sunak, who earlier this year, was a favorite to become the next Prime Minister will be fined by the London policy for attending parties during the lockdown. Both had denied the initial accusations. Russia’s invasion of Ukraine appears to have done more to bolster Johnson’s standing in polls than any action the Prime Minister himself has taken. Our view remains that after the local elections early next month, the political fallout will be clearer.

On top of this rather embarrassing development (and the government’s own investigation – Gray’s report – can only proceed), the UK reported a larger than expected jump in inflation. The preferred measure of CPI which includes home-owner costs (CPIH) rose to 6.2% from 5.5%. CPI itself rose 1.1% on the month for a 7.0% year-over-year pace, the most in 30 years. At the same time, it reported that producer input prices are rising faster than output prices, warning of a squeeze on corporate profits. Output prices rose 2% in March, not the 1.2% expected, for a year-over-year of 11.9%. Input prices surged 5.2%, more than twice what was expected (2.0%). The year-over-year increase rose to 19.2% from a revised 15.1%. The odds of a 50 bp at the next BOE meeting increased to a little more than 20% from around 12% yesterday.

The ECB meets tomorrow. The accelerating price pressures require an adjustment in ECB policy, but no move is expected. Instead, the focus is on the forward guidance on the asset purchases. The issue is that last month, the ECB adjusted its bond purchases for Q2 under the Asset Purchase Program now that the emergency program ended. It left open-ended what it would do in Q3. The hawks are pushing for a clear stop to the bond purchases, which need to end before rates can be raised. The swaps market has about 15 bp hike priced before the summer recess and almost 70 bp before the end of the year. There will likely be questions at tomorrow’s press conference about a new facility to counter exogenous shocks that threaten to fragment (wider spreads between the core and periphery) the debt market. It could be a quid pro quo for ending the formal APP program, but the hawks may insist on some conditionality.

The euro drew nearer $1.08 today (~$1.0810) after being turned back from $1.09 yesterday. A break of $1.08 would likely spur a move to the March 2020 low near $1.06. Talk of parity is increasing. On the upside, we suspect the initial resistance is around $1.0860. It is the fourth session sterling is has traded below $1.30. Although it has yet to close below there, it has made lower lows. Today, it reached $1.2975, to take out last week’s low (~$1.2985). We continue to see potential toward $1.2830. The $1.3025 area may offer resistance now.

America

US inflation is very much in focus with today’s PPI on the heels of yesterday’s CPI report. The March CPI accelerated 1.2% on the month for an 8.5% year-over-year pace. The core rose a little less than expected (0.3% vs. 0.5%) for a 6.5% year-over-year pace. That was the smallest monthly core increase since last September, and the second consecutive decline in used car prices helped. The 18% surge in gasoline prices accounted for more than half of the monthly increase in the headline rate. Overall, energy prices rose 11% and the secondary impact is seen with a 10.7% increase in airfares. Owner equivalent costs rose by 0.4% for the second month and are up 4.5% from a year ago. One survey found that nearly 85% of American households expected to cut spending due to higher prices. Meanwhile, as more Americans accept that Russia is responsible for the most recent surge in energy prices, President Biden’s support appears to have begun to solidify. Senator Manchin is trying to resurrect the Keystone pipeline that Biden nixed quickly when he took office. Today, the US reports March producer prices. The headline is expected to have accelerated (to 10.6% from 10%), but this is due primarily to food and energy. The core rate may have stabilized around 8.4%.

A week ago, the swaps market was pricing a risk that the Bank of Canada would hike by 75 bp today. Now it’s not quite pricing in a 50 bp hike, but that seems to still be the most likely scenario. The economy is performing well, with a positive terms-of-trade shock, and more fiscal support, with employment higher than it was on the eve of the pandemic. A recent survey by the central bank found that 70% of businesses see inflation above the 1%-3% target over the next two years and 40% see it above 4%. The swaps market is pricing in 115 bp hikes in the next three months and almost 180 bp in the next six months. The Bank of Canada will also likely signal the beginning of the unwinding of its balance sheet. It will do so by stopping reinvesting maturing proceeds. It appears that portfolios of bonds the central bank bought are of shorter maturity than the other major central banks. This could lead to a more rapid reduction of the balance sheet.

Still, the Canadian dollar remains on the defense. The greenback poked above CAD1.2660 yesterday for the first time in almost a month. When US equities turned higher, the greenback fell back toward CAD1.2580 before bouncing to around CAD1.2640. It is pushing a bit above there in the European morning. We suspect there is potential toward CAD1.27, but the details of the Bank of Canada statement may make for a more volatile North American session. Meanwhile, the greenback is approaching the low for the year against the Mexican pest set earlier this month near MXN19.7275. The demand for the peso has been quite persistent. Today is the fifth consecutive gain, but consider that since March 10, the peso has fallen in only three sessions and two of them were last week. Last year’s low was around MXN19.55.

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