Despite the move higher in commodities, the CAD is the weakest currency overnight after a less hawkish than expected Monetary Policy Report from the Bank of Canada. The BoC kept rates unchanged, as expected, and said it would “remain cautious with respect to future policy adjustments”. The BoC boosted its estimates of potential growth, a nod to Governor Poloz’s previous comments that the economy can sustain somewhat stronger growth without generating higher inflation. Poloz said higher interest rates will be warranted over time, but didn’t go out of his way to suggest the next move was imminent and specifically mentioned trade conflicts and geopolitical risks; the market now prices a May rate rise as a 33% chance with July around 80% priced.
The GBP is the other underperformer in FX markets after lower than expected UK CPI (both headline and core measures). The post-Brexit increase in imported inflation seems to be waning, although with the unemployment rate at 4.2% and a transition deal between the UK and EU in sight, the market still attaches around an 80% chance the BoE will hike rates next month, to 0.75%.
The EUR is largely unchanged, just below 1.24, with the final reading of Eurozone core inflation matching expectations at 1%. News overnight that Germany’s public sector workers had agreed to wage increases of over 3% over the next few years will likely please the ECB, given core inflation remains well below its target.
The NZD fell to just above 0.73 in the London morning, before recovering to around 0.7325 now. CPI released this morning will be a major focus. We are looking for a 0.4% increase in headline CPI on the quarter, is in line with the median estimate among economists. NZD/AUD has drifted down to just above 0.94, with the AUD likely benefiting from recent strength in oil and metals prices.
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