Risk On, Dollar Off

July 21, 2026

Elias Haddad

Risk appetite firm, dollar softer. Weekly ADP up next.

NZ Q2 CPI backs additional RBNZ rate hikes.

UK May labor market data points to ongoing slack. BOE rate bets ripe for dovish repricing.

Global equities are extending their rebound with Asian markets leading the charge. Chinese state support for tech shares helped lift the CSI 300 by more than 3%, while Taiwan and Korea also rallied sharply. Brent crude oil prices are a little firmer near $90 a barrel. Ongoing US-Iran hostilities continue to delay the full reopening of the Strait of Hormuz.

USD pared back some of yesterday’s gains, with high-beta currencies outperforming. We still expect USD to edge a bit higher in the next couple of months underpinned by: (i) US economic outperformance, (ii) the Fed's resolve to get inflation back to 2% anchoring hawkish rate pricing, and (iii) strong foreign demand for US long term securities.

The July PMI readings for the major economies (due on Friday) will test whether the US growth advantage remains intact. Today, the ADP private employment change for the week ending July 4 is the focus (1:15pm London, 8:15am New York).

The sell-off in gilts and GBP stabilized after Prime Minister Andy Burnham picked John Healey – former Defense Secretary - as his Chancellor of the Exchequer. In parallel, Burnham stressed yesterday he will “stick to the fiscal rules…and use obviously any flexibility within them.”

Attention now turns to how Burnham plans to use that “flexibility” to fund spending. The details may not emerge until the October budget. Until then, we expect fiscal policy uncertainty to limit relief rallies in gilts and GBP.

UK May labor market data was largely in line with consensus. The unemployment rate was unchanged at 4.9% for a second straight month in May and the vacancies-to-unemployment ratio remained stuck at 0.4, below its estimated equilibrium level of 0.50. That is indicative of ongoing labor market slack. Indeed, the policy-relevant private sector regular pay growth slowed to 2.9% y/y in May (lowest since October 2020 and tracking the BOE’s Q2 projection of 3.0%) vs. 3.0% in April.

The swaps curve price in a full 25bps BOE rate hike to 4.00% in November and a total of 60bps of tightening in the next twelve months. That would leave the policy rate above the BOE’s estimated neutral range (2.00%-4.00%).

Bottom line: restrictive monetary policy when the UK economy is operating well below potential raises the likelihood of a downward adjustment to BOE rate expectations against GBP.

NEW ZEALAND

NZD/USD rallied to near a seven-week high. New Zealand Q2 CPI was mixed. Headline CPI rose more than expected in Q2 but was marginally lower than the RBNZ projected in May.

Headline CPI increased 1.5% q/q (consensus: 1.4%, RBNZ: 1.6%) vs. vs. 0.9% in Q1 driven by higher petrol prices. Year-over-year inflation quickened to 4.1% (consensus: 4.0%, RBNZ projection: 4.2%) vs. 3.1% in Q1. Core inflation (average of the sectoral factor model, factor model, and CPI ex. petrol prices) rose to the top of the RBNZ 1-3% target range.

Above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes which is NZD supportive. At its last July 8 meeting, the RBNZ raised the Official Cash rate (OCR) 25bps to 2.50% and indicated that “further OCR increases appear likely at upcoming meetings.”

The swaps curve price in 60bps hikes by year-end and a total of 100bps of tightening over the next twelve months to 3.50% - near the top of the RBNZ estimated neutral range (2.20%-4.10%).

CANADA

CAD is underperforming other high-beta currencies. The Trump administration announced yesterday a 50% tariff on nearly $20 billion in imports from Canada (0.85% of Canada’s GDP), which will take effect on August 19.

The tariff would apply to a range of products from wine to hockey sticks to cement. The tariff will not apply to energy, potash, products subject to tariffs under Section 232, and other goods like fish or critical minerals.

Meanwhile, Canada inflation cooled more than expected in June. Headline CPI printed at 2.8% y/y (consensus: 2.9%) vs. 3.2% in May on lower gasoline prices. The policy-relevant core CPI (average of trim and median) dropped to 1.85% y/y (consensus: 2.05%) vs. 2.05% in May, matching the September 2020 low. Core CPI ex. food & energy was marginally hotter than anticipated at 1.8% y/y (consensus: 1.7%) vs. 1.6% in May.

Bottom line: worsening US-Canada trade dispute and core inflation running below the Bank of Canada’s (BOC) 2% target, support an extended BOC pause. As such, there is room for BOC rate hikes bets (50bps in the next twelve months) to adjust lower against CAD.

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