Will they? Won’t they? And what will they say? That sums up the global market’s fixation on the US inflation outlook and Fed monetary policy in June and likely for July. S&P 500 traders did not appear to have many concerns as they bought the index steadily and it finished the month with a gain of 3.35%. FX traders were torn between buying and selling US dollars in the first half of the month, but it was the May inflation data and the FOMC dot-plot projections that resolved the direction. The greenback rallied steadily from June 14th to the end of the month with the US dollar index climbing from 103.85 to 105.80. The European Central Bank’s decision to cut rates by 25 bps on June 6 supported the rally. The Bank of England left its benchmark rate unchanged in a 7-2 decision, which was expected due to Prime Minister Rishi Sunak calling an election for July 4.
July brings its own set of problems. The UK is poised to have a Labour Party Prime Minister (Keir Starmer) with voters handing him a massive majority. In France, Marine Le Pen’s National Party is set to become a powerful force in the government, and she is thought to be anti-euro. President Joe Biden’s dismal debate performance on June 27 raised fears that because of his advanced age he is unfit to govern. On July 1, the Supreme Court paved the way for another Trump presidency when it ruled, he could not be prosecuted for any actions that were within his constitutional powers.
The USD and Federal Reserve
The US dollar was in demand for the last half of June but comments by Fed Chair Jerome Powell on July 2 sparked a sharp reversal in the rally. Mr. Powell wore his “dovish hat” as he kicked open the door to an earlier than expected rate cut. He said, "I think the last reading and the one before it to a lesser suggest that we are getting back on the disinflationary path. We want to be more confident that inflation is moving sustainably down toward 2% before we start loosening policy." His remarks overshadowed but complemented comments in the minutes of the FOMC meeting from June 14, which were released on July 3. The minutes noted that “Participants noted the uncertainty associated with the economic outlook and with how long it would be appropriate to maintain a restrictive policy stance.” FX traders will continue to focus on data ahead of the July 31 FOMC meeting, although rates are expected to be left unchanged at 5.25%.
The Canadian Dollar and Bank of Canada
The Canadian dollar was rangebound but traded erratically in a USDCAD range of 1.3620-1.3790 band. The Bank of Canada cut the overnight rate by 25 bps to 4.75%, which was widely expected. The tone of the statement and Governor Macklem’s press conference was a tad dovish and set the stage for further rate cuts, although Mr. Macklem insisted decisions would be data-dependent. The Canadian dollar traded with a negative bias until the middle of the month when domestic inflation data was released. CPI rose 0.6% in May, well above the forecasts and suggested expectations for another Bank of Canada rate cut as early as July 24 were misguided. Fed Chair Jerome Powell’s dovish comments on July 2 sparked a broad-based US dollar sell-off which could extend USDCAD losses to 1.3560.
Oil Price
Oil prices climbed throughout June, rising from a low of 72.72 on June 4 to 82.34 at the end of June. The price gains were fueled by escalating tensions between Israel and Hezbollah which were aggravated by Iran’s threat to participate. Furthermore, OPEC, IEA, and analysts were forecasting that the US summer driving season, and existing production cuts, combined with an early start to hurricane season would ensure that demand would outstrip supply. The rally continued into the beginning of July.
Bank 2024-USD/CAD Q3 2024-USD/CAD Q4
Scotiabank* 1.3800 1.3600
BMO 1.3800 1.3600
CIBC 1.3900 1.3800
TD Bank* 1.3900 1.3900
National Bank 1.4000 1.4200
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
