FX Daily Strategy: N America, April 16th

USD may recover modestly on US retail sales

GBP little affected by softer CPI

CAD has scope for modest gains on unchanged BoC

Risky currency pairs could reverse some recent weakness if volatility declines further

UK CPI has come in a little weaker than expected, but EUR/GBP was initially focusing more on the risk downturn seen overnight as China talked tough on trade.  The March data is of limited significance in any case, as the April numbers are much more likely to deviate from expectations. A series of energy, utility, post office and some other regulated and service price rises are due in April, albeit now possibly offset somewhat by a fall in petrol prices if the slump in energy prices persists. Even so, we wouldn’t expect EUR/GBP to advance much further without a more serious turn lower in risk sentiment. Although the S&P 500 was lower overnight, it is in the middle of the 4800-5800 range seen since the tariff wars began near the end of March, and as long as this range holds, we should see volatility edge lower and riskier currencies regain some composure. GBP has recovered after its early dip and EUR/GBP has scope to move further towards 0.85. 

We expect US retail sales to rise by 1.3%, led by autos, in what will be a strong end to a subdued quarter. Ex autos we expect a moderate rise of 0.5% but ex autos and gasoline the rise we expect sales to rise by 0.8%. Industry data suggests a sharp rise in auto sales. This may be due to spending being accelerated due to fears of tariff-led price hikes. Data at this stage will be hard to interpret because of potential timing distortions related to tariff concerns, so there is unlikely to be a great deal of market reaction to these numbers. In any case, our forecasts are broadly in line with consensus. Still, given the weakness of the USD in the last few weeks, a stronger end to Q1 may be seen as encouraging, moderating the risk of a sharp Q1 GDP contraction.

UK March CPI Inflation to Slip Back Broadly – Albeit Temporarily?

Source: ONS, Continuum Economics

The BoC decision is a little more in the balance after the stronger than  expected Canadian CPI reported on Tuesday. Even so, we don’t expect a BoC rate cut, despite the market now pricing a 25bp cut as close to a 50-0 chance. The BoC minutes at the last meeting preached caution, and given the current uncertainties we would expect them to leave things alone for now. This could allow USD/CAD to slip back towards 1.38, but major CAD gains look unlikely, as USD/CAD declines have run a little head of yield spreads and while we may not get a cut this month, a cut is likely before too long.

After the mildly positive equity market performance seen on Tuesday we can see some more broadly neutral trading up to Easter, with the market now likely to need hard data to decide how damaging the tariff furore has been. Lower volatility should be enough to allow some more gains in the riskier currencies that sold off with equities earlier in the month, even if we don’t see much recovery. The NOK may have the most scope for further recovery, as it continues to hover near all time lows against the CHF, which could also see some more general weakness if volatility declines.