Daily Market Comment – US inflation report and BoC rate decision coming up

  • Euro/dollar stabilizes around parity, awaits US inflation data for fuel
  • Another round of selling hits stock markets and commodity prices 
  • RBNZ raises rates but markets barely react, Bank of Canada next
You shall not pass

The price action in euro/dollar has captivated the entire financial system this week as the bulls and bears battle it out for control of the parity level. It has been a stalemate so far, although that might change once the latest US inflation report is released and provides ammunition to one camp. 

Inflation as measured by the CPI is forecast to have accelerated both in monthly and yearly terms in June, rising by 1.1% from last month and by 8.8% on the year. Most of this reflects soaring prices of fuel, food, airfares, and rents. 

That said, some other factors suggest inflation is simmering down. The S&P Global PMI reported that services companies raised their selling prices at the slowest pace since last September, thanks to waning demand. Various commodity prices including energy have started to roll over as well, although it might be too early for this to show up. 

Most importantly, investors will be watching the core CPI rate with hawk eyes. It has been falling steadily since March and if this pattern continues, it might be enough to convince investors that underlying inflation has started to lose its punch, leading to some profit-taking in the mighty dollar. 

Equities and oil take a hit

In the broader market, it was another bruising session dominated by growth concerns. Wall Street came under renewed selling pressure as market participants concentrated on risk management, reducing exposure to equities to minimize any damage in case the inflation report comes in hot. 

There was also a fake report doing the rounds on social media that the CPI data had been ‘leaked’ and were much hotter than expected. Although this was later debunked, it may have tricked some trading algorithms into selling riskier assets.  

In the energy complex, oil prices took a sharp hit with WTI crude falling back below the psychological $100 mark. There was no clear catalyst behind this crash, which seems to boil down to a combination of demand concerns following the latest lockdowns in China and the prospect of more production coming online amid signs the US and Saudi Arabia are mending their relationship. 

RBNZ raises rates, BoC next 

In the central bank arena, the Reserve Bank of New Zealand raised interest rates by 50bps overnight, in line with market pricing. The knee-jerk reaction in the kiwi dollar was lower, although the move quickly retraced. 

Looking ahead, the most crucial variable for the kiwi will be how global forces evolve. Recession worries are currently in the driver’s seat, dampening both risk sentiment and commodity prices. In this kind of regime, any relief rallies in the New Zealand dollar are likely to remain shallow, until nerves around global growth begin to calm down. 

As for today, the central bank baton will pass to the Bank of Canada. Economists and market participants alike expect the BoC to follow in the shadow of the Fed and raise rates by 75bps, as the labor market is firing on all cylinders and inflation expectations have started to heat up. 

Since the rate increase itself is fully priced in already, the market reaction will hinge on the tone of the press conference and the updated economic forecasts. Of course, the loonie’s overall direction will also depend on how oil prices perform.

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