Another interest rate decision and another surprise hike. The Bank of Canada elected to hike by 0.25% yesterday, citing that the economy is still running too hot with a tight labour market and inflation running stubbornly high. Market pricing for additional hikes also increased, with the end of the year pricing now suggesting interest rates to be at 5.13%. CAD gained across the board as a result, and GBPCAD is now 3% off the highs seen in May and now back at the lows see in April. The hawkish message spread amongst the markets, with markets adding to rate hike expectations from the BoE, ECB, and the Fed. US treasuries continued to climb as a result invoking some demand for USD. Market pricing for Fed rates by year-end is now near enough 0% - a sharp reversal from pricing in March and April which factored in 0.90% worth of rate cuts.
* Daily move - against G10 rates at 5:00pm, 07.06.23
** Indicative rates - interbank rates at 5:00pm, 07.06.23
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All eyes on the EUR and revisions to growth data from the first quarter of this year, with expectations for a lower revision of 1.2%. The weakness that we saw on the EUR in May has reduced so far in June, with markets seeing current levels as an opportunity to buy EUR at a relative discount to the recent highs the currency has made in 2023. A stronger than expected GDP number will likely encourage more EUR buying, and suggest that the next indicated 0.25% rate hikes by the ECB will happen in coming months. The weekly jobless claims from the US will also be in focus, and any reduction in numbers should continue to support USD.
Markets so far in June have been quiet with lower volatility seen in the FX space. So now would be a good time for clients that import to take stock of recent gains for GBP to help decide future buying of foreign currencies. Weaker than expected inflation data from the UK in May caused money markets to increase expectations of the BoE to raise interest rates by year-end from 0.5% to 1% - a considerable hike off one number. However, there could well be headwinds for the BoE to be able to hike rates to this extent.
As mentioned already this week, the UK’s property market remains under pressure as borrowers continue to feel the pain of higher mortgage rates, with those looking to re-mortgage this year likely to see an increase of 4% on interest payments. How will homeowners cope with another 1% on top of that? According to the Recruitment & Employment Confederation, job hires in the UK were subdued in May due to economic uncertainty as well as pay growth slowing since April as staff supply expanded at the quickest rate since December 2020. So perhaps the UK’s job market is showing signs of slowing?
We can see clearly below the correlation between the expectation of additional rate hikes on the GBP index, which currently sits near 1-year highs. For buyers of foreign currency, it's worth noting the potential headwinds the BoE could face to keep up with the markets rate hike expectations, and any signs that they can’t/won't could cause GBP to come off these highs.
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