An early-week rebound in the dollar is losing steam this morning as markets shift focus toward macroeconomic indicators and await developments in trade negotiations between the US and China. The greenback is trading slightly lower against a basket of its most-traded peers, benchmark ten-year Treasury yields are almost unchanged, and equity futures are positioning for modest gains at the North American open.
Data published yesterday showed US labour markets cooling only slightly in April, even as business and consumer confidence measures plunged. According to the closely-watched Job Openings and Labor Turnover survey, job postings increased by 191,000 to 7.4 million in the month—trouncing market expectations for a net decline—and hiring numbers climbed. The quits rate—a proxy for worker confidence levels—declined slightly to 2.0 percent from 2.1 percent, suggesting that demand is easing somewhat. Although the layoff and discharge rate inched higher to 1.1 percent from 1.0 percent in the prior month as the construction, professional and business services, and leisure and hospitality sectors shed jobs, it remained very low from a historical perspective.
Trade frictions are still simmering in the background. US steel and aluminum tariffs doubled to 50 percent overnight, hitting Mexico and Canada hardest. Washington has reportedly asked a number of countries to submit trade proposals by today, suggesting that the administration is seeking to announce a series of “deals” before a self-imposed July 8 deadline for ratcheting ‘reciprocal’ tariffs higher. And negotiations with Beijing remain fraught, with Chinese foreign minister Wang Yi yesterday telling his American counterparts to create the “necessary conditions” to put discussions on the “right track”, prompting Trump to publish a post on social media this morning saying that he likes President Xi Jinping, but he is also “very tough, and extremely hard to make a deal with”. Policy uncertainty levels have come down from their early-April peaks, but remain far from normal.
Nonetheless, overall market volatility is fading as investors become inured to trade war headlines and economic data releases show signs of stabilisation. The VIX implied equity volatility index – which functions as Wall Street’s ‘fear gauge’ and acts as a proxy for changes in wider risk sentiment – seems to be following its typical seasonal trajectory, declining into the summer months.
Odds on a rate cut at this morning’s Bank of Canada decision are holding below the 25-percent threshold, but growing economic headwinds mean that most investors expect to see a modestly-dovish shift in the tone of its communications. Although headline growth outperformed expectations in the early part of the year, much of the strength reflected temporary tariff-related distortions, and underlying domestic demand weakened. Core inflation has remained firm and wage pressures remain persistent, yet rising unemployment and ebbing confidence point to mounting slack in the economy. With a raft of critical data releases and trade headlines set to hit between now and the July meeting, the Bank seems likely to adopt a cautiously dovish posture—signalling that a rate cut is in play, contingent on further softening in inflation and labour markets. Language in the statement or the post-decision press conference expressing greater confidence in the disinflation trend or highlighting downside risks to demand could support this narrative, and put renewed downward pressure on the Canadian dollar, while a more confident and hawkish tone might offer support via a narrowing yield differentials against the US dollar.
Tomorrow’s European Central Bank decision should leave markets largely unmoved. A 25 basis-point rate cut is fully priced in, and policymakers are likely to avoid offering clear forward guidance, instead articulating a preference for maintaining a data-dependent stance for now as they wait to assess how constantly-shifting tariff policies are impacting the economy. Updated projections should show inflation expectations ratcheting down and economic risks tilting further to the downside, supporting investor expectations for at least one more cut this year.
President Christine Lagarde’s comments could offset dovish hints however – particularly if she is asked about the Bank’s views on the euro’s recent ascendance. In a remarkable speech a few weeks ago, she outlined a case for bolstering the euro’s international role, suggesting that greater use of the common currency in international trade and reserve balances could allow European businesses to borrow at lower costs, better insulate the bloc against exchange rate volatility, and shield it from sanctions and other coercive measures employed by countries elsewhere. “The ongoing changes create the opening for a ‘global euro moment,'” she said, “The euro will not gain influence by default – it will have to earn it” by establishing deeper, more integrated capital markets, offering a global liquidity backstop, entering more extensive trade agreements, and building up military strength. Although the dollar’s reserve role has eroded in recent decades, the euro has largely failed to capitalise on this – as illustrated in the chart below, gold has gained (mostly on an upward revision in valuations), and a range of other currencies have nipped at the greenback’s lead, but the common currency has maintained a steady share over time. Evidence of a serious effort to change this would help reinforce an ongoing reallocation in investment portfolios away from the United States, with attendant effects on the euro exchange rate.
