USDJPY edged to new highs overnight after the last CPI data from Japan failed to budge Bank of Japan expectations and yields elsewhere remain at the high end after the big break higher in US long yields. Today’s calendar focus is on CAD, and Italian politics will grab the spotlight over the weekend.
Concerns surrounding Italy’s political situation are a bit below recent highs as measured in the European peripheral spreads, but after an initial and relatively modest adjustment, the euro crosses suggest that the market sees the situation as contained at the moment. There will be more horse trading within the awkward, populist Lega-Five Star Movement coalition over the weekend, and a (likely FSM) prime minister has yet to be named, but this weekend could see further crystallisation of the political picture and the market will have to take a stand next week on whether to unwind the euro and EU peripheral debt discount or decide that the existential threat remains a real and present danger.
We suggest the latter, though the fuse may be very long on this particular time bomb for the EU.
The JPY has grabbed the battle standard in the charge to the bottom of the heap among G10 currencies, weakening further overnight to as far as 111.00 in USDJPY after a slight miss in the latest CPI data. Even if CPI does crawl a bit higher over the next month or two, the market will be quick to write it off as linked to higher oil prices (which are a significant contributor to JPY weakness here, in our view) and a weaker currency. Wage pressures in Japan are another matter if these continue to rise in line with the latest release at near 2.0%.
Today’s focus swings to Canada with its latest April CPI and March retail sales releases. The country’s rate expectations have more or less kept track with US counterparts over the last few weeks and the vastly stronger oil prices are CAD-positive. On the structural side, however, we suspect Canada is more sensitive to higher rates feeding into a sharper slowdown in private household debt.
USDCAD has been triangulating and will need to choose a direction next week. We suspect higher if the USD is firm elsewhere. The next Bank of Canada meeting is up on May 30.
USDCAD has not participated in the strong USD move of late, though it has found support around the 1.2750-25 area well above the prior range low and the 200-day moving average above there around 1.2650. To the upside, the descending trendline is a potential catalyst for longs, but clearing the 1.3000 level again is vital for a bullish attempt at higher levels. To the downside, a drop to 1.2700 with USD sideways to weaker elsewhere could usher in a test of the range lows below 1.2550.