FX Daily Strategy: N America, April 16th
GBP in focus on labour market and CPI data
Scope for a more dovish tone to emerge if earnings data soften further
EUR/USD downside looks more restricted from here
JPY likely to have bottomed out on the crosses
UK labour market data may bring rate cut expectations forward
Recent GBP strength may consequently see some retracement
Canadian inflation should help USD/CAD to stabilise below 1.38
JPY intervention risk high
GBP initially traded slightly softer after the release of the latest set of UK labour market data, but quickly recovered. We continue to see the HMRC data as being both more reliable and more up to date, although these only cover payrolled employees. These show only a marginal rise in average earnings in the latest month and a fall in the y/y rate of earnings growth to 5.6%, but there was an upward revision to the February data so the y/y rate in March is close to the originally reported February rate. The ONS version of the average earnings data shows a similar growth rate of 5.6% in the 3 months to February (one month behind the HMRC data). The earnings data doesn’t really support a weaker pound, coming in close to consensus. However, the employment data is clearly on the weak side of expectations, both in the HMRC numbers and the ONS data. The HMRC data shows a 67k decline in employment in March, the largest decline since the pandemic, while the ONS data shows a 156k decline in the 3 months to February, and a rise in the unemployment rate to 4.2%.
This is clear evidence of a loosening in the labour market and while it probably won’t be enough to swing the MPC towards a rate cut in May, another number along these lines might be enough to trigger a move in June. The market is currently pricing June as around a 40% chance, and the path of UK rate cuts is priced to be more similar to the US than the Eurozone. This looks out of line with the likely economic performance, which remains much more similar to the Eurozone than the US. There is therefore scope for UK yields to fall from here, and GBP to fall with it, although the lack of real weakness in the earnings data suggests that EUR/GBP is unlikely to progress far above 0.8550 at this stage.
We expect March Canadian CPI to move higher to 3.0% yr/yr from 2.8% in February and 2.9% in January, with the monthly data likely to look quite firm after two soft months. However we do expect some modest progress lower in two of the three BoC’s core rates. We expect the monthly data to show overall CPI up by 0.7%, with a 0.6% increase ex food and energy, before seasonal adjustments, though some of the increase will be seasonal. We expect seasonally adjusted data to show a 0.4% rise overall, lifted by gasoline, with a 0.3% increase ex food and energy. At the last meeting, the Bank of Canada made no policy changes with rates left at 5.0% and Quantitative Tightening continuing as expected. However the tone of the statement was significantly more optimistic on inflation, focusing more on this than recent signs of stronger activity. The BoC still needs to see progress on inflation sustained before easing, but looks likely to move sooner than the FOMC. Our forecasts for CPI are essentially in line with the market consensus, but the slightly edging up in y/y inflation data might lead to a modest rise in Canadian yields and help stabilise USD/CAD below 1.38.
Other than the UK and Canadian data, there is likely to be a lot of focus on USD/JPY, with potential for BoJ intervention rising as the JPY falls. The Japanese authorities were no doubt reluctant to oppose the rise in USD/JPY last week as it was a USD move, with the JPY actually strengthening on the crosses. However, Monday has seen the JPY weaken across the board, and this looks much more likely to be opposed. We continue to see the 165 area ain EUR/JPY as likely to be a hard level to hold above.