Risk Mode Reignited

August 09, 2024

Elias Haddad

Risk Mode Reignited

USD is lower against all major currencies and global equity markets continue to recover.

Canada’s July labor force survey will help shape expectations for a 25bps or 50bps BOC rate cut next month.

Norway inflation broadly matched consensus in July but is tracking below the Norges Bank’s forecast.

Please note there will be no London edition of the BBH CurrencyView daily report next weeks as I’ll be away on vacation. Publication will resume August 19.

USD is lower against all major currencies and global equity markets continue to recover. Yesterday’s bigger than expected drop in US weekly jobless claims triggered a pick-up in risk appetite. It’s hard to believe that a weekly claims report can move markets, but it just goes to show that labor market concerns are real and there's no other data to guide us.

Meanwhile, Kansas City Fed President Jeffrey Schmid (2025 FOMC voter) reminded market participants that “overall, the labor market still appears healthy.” Schmid specifically referenced the KC Labor Market Conditions Indicator (which combine information from 26 labor market indicators) noting “the labor market still appears to be quite strong by this measure.”

Richmond Fed President Thomas Barkin (FOMC voter) was equally constructive on the US labor market. Barkin said “the labor market is in better shape than feared”, pointing out that “[Businesses are] managing headcount through attrition, or they're slowing their hiring, but they're not firing.” Indeed, the JOLTS layoff rate dipped 0.2pts to 0.9% in June, matching the April 2022 low.

Bottom line: there is room for US interest rate expectations to adjust higher in favour of USD and Treasury yields. Fed funds futures are still fully pricing-in 100bps of easing by year-end. There are no US economic data releases or scheduled Fed speakers today. Fed Governor Michelle Bowman speaks tomorrow.

USD/CAD is consolidating near recent lows around 1.3740. Canada’s labor force survey takes the spotlight today (1:30pm London). Consensus sees a 25k rise in jobs vs. -1.4k in June, while the unemployment rate is projected to increase 0.1pts to 6.5% on an unchanged participation rate of 65.3%. Overall, Canada’s labour market has cooled significantly and the Bank of Canada (BOC) is particularly concerned with emerging slack in the labor market.

The swaps market is pricing-in 60% odd of a 50bps BOC rate cut in September. A poor job print today will reinforce expectations for an outsize rate cut next month and undermine CAD. In contrast, a decent job print will validate the case for just one 25bps cut in September and offer CAD intra-day support.

USD/NOK is trading in a tight range. Norway inflation broadly matched consensus but is tracking below the Norges Bank’s forecast. In July, annual headline CPI inflation quickened to 2.8% (consensus: 2.8%, prior: 2.6%) while underlying CPI unexpectedly eased to 3.3% (consensus: 3.4%, prior: 3.4%). For Q3, the Norges Bank penciled-in headline CPI at 3.9% and underlying CPI at 3.7%.

The implication is the Norges bank may need to cut rates sooner and by more than they currently forecast which is a drag for NOK. At the June meeting, the Norges Bank cautioned that the policy rate will likely be kept at 4.50% to the end of the year, before gradually being reduced from Q1 2025. The Norges Bank has a first full 25bps cut pencilled-in Q2 2025 while the swaps market sees almost 125bps of cuts over the next twelve months. The Norges Bank holds a policy setting meeting next week.

USD/MXN edged down in line with improving global financial market risk sentiment. Yesterday, Banco de Mexico cut the policy rate 25bps to 10.75% in a split 3-2 vote decision. The 2 dissenting board members supported maintaining rates at 11.00%. Financial markets were also divided ahead of the decision as 15 of the 29 analysts polled by Bloomberg expected a rate cut.

Looking ahead, the Banco de Mexico “foresees that the inflationary environment may allow for discussing reference rate adjustments.” Indeed, more rate cuts may be in the pipeline if Mexico core CPI inflation tracks the bank’s projection and drifts lower to the 3% target by Q4 2025. The swaps market is pricing-in 200bps of easing over the twelve months. Still, real interest rates in Mexico are expected to remain positive and supportive of MXN.

China headline inflation quickens in July. Annual headline CPI rose to 0.5% (consensus: 0.3%) from 0.2% in June as adverse weather in some regions pushed food prices up. Excluding food & energy, core CPI inflation eased to a seven-month low at 0.4% y/y from 0.6% in June and producer prices fell for a 22nd consecutive month in July. Bottom line: China’s economy is still struggling to escape deflationary risks. As such, monetary policy is likely to get looser and further weigh on CNH.

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