Market wrap: GBP and Loonie in focus - Westpac

Analysts at Westpac explained that GBP and CAD fell sharply on soft UK CPI data and a cautious Bank of Canada meeting respectively. 

Key Quotes:

"AUD/USD emerged from NY trade slightly firmer, around 0.7785. US bond yields continued this month's grind higher. Today we see key data: Australia March employment and NZ Q1 inflation. In the UK it's Mar retail sales data while Fed commentary continues.

UK March inflation surprised on the downside with all measures 0.2% lower than anticipated. Headline inflation pulled back to the lowest level in a year at 2.5% y/y and core inflation is now 2.3%y /y. Although the BoE remains likely to raise rates at its 10 May meeting, the pressures on their glacial guidance have eased. Pricing for a May hike is now around 83%, having recently been as high as 95%. GBP/USD tumbled 1 cent from 1.4275 to 1.4175 on the data, later steadying around 1.4200.

The Bank of Canada held its policy rate at 1.25% as was about 80% priced in. The statement noted progress on inflation and wage growth so “higher interest rates will be warranted over time.” But there were several dovish notes, including concern over both NAFTA and protectionist US-China trade measures and an updated estimate of Canada’s economic potential which found “a little more room for demand growth” without stoking inflation. USD/CAD bounced on both the initial statement and the press conference, from around 1.2550 to 1.2660. Markets price a 44% chance of the BoC hiking on 30 May instead.

Final Eurozone March headline CPI dipped slightly from its initial release to 1.3% y/y (from 1.4%). Although core inflation remained unchanged at 1.0%, the lack of inflationary pressures in front of next week’s ECB meeting may reduce any haste towards their policy guidance. EUR/USD remained confined to a 1.2340-1.2400 range.

USD/JPY ranged between 107.10 and 107.40, showing no apparent benefit from higher US yields. AUD/USD bounced off a 6 day low of 0.7744 to 0.7798 then steadied up 0.2% on the day, outperforming within the G10 currencies. NZD/USD bounced off a one-week low of 0.7304 to 0.7325. AUD/NZD extended a multi-day rise from 1.0580 to 1.0634 – a two-week high.

Both short and long maturity US treasury rates rose. The US 10yr treasury yield rose from 2.82% to 2.87%, a high since 22 March, while 2yr yields extended a multi-year uptrend to 2.43% - the highest since 2008. Fed fund futures yields continued to price the next rate hike in June around a 90% chance.

There was plenty of Fed commentary again, including NY’s Dudley saying trade wars are not winnable and the Beige Book reporting that “Outlooks remained positive, but contacts in various sectors including manufacturing, agriculture and transportation expressed concern about the newly imposed and/or proposed tariffs.”