Credit Agricole

Asia overnight: Investor concerns about the end to the reflation trade remains the key driver of sentiment at the moment. A rise in US initial jobless claims data and the US announcing that it plans to add more Chinese entities to its blacklist over Xinjiang did not help sentiment. China’s CPI inflation data came out slightly below consensus and both PPI and CPI inflation are in retreat. Our China economist believes these data give room to Chinese authorities to undertake the RRR cut that has been flagged in the media recently. Importantly, concerns about Chinese growth along with rising Covid infections globally are what started the unwinding of reflation trades. S&P500 futures and Asian bourses were both trading in the red at the time of writing. Risk-off trading continued to see commodity currencies underperform the rest of the G10 during the Asian session with the NZD and NOK leading the declines. The USD and CHF were the strongest performers in the G10 in the Asian session.

GBP: buyer’s remorse The GBP continues to suffer from ‘buyer’s remorse’ as investors who once saw the pound as a good way to benefit from the rapid vaccine rollout in the UK and the subsequent reopening of the British economy are now ‘bailing’, concerned about the resurgence of the pandemic and its negative impact on the economy. We further think that there are other downside risks to the current UK economic outlook given the removal of government support measures and the persistent post-Brexit uncertainty. These risks could also mean that the BoE may disappoint current rate hike expectations by delaying lift-off till 2023. We therefore maintain a cautious outlook on the GBP for now.

Moreover, given the heightened GBP sensitivity to market risk sentiment, we continue to view short GBP/USD as a useful hedge to spikes in risk aversion. On the day, focus will be on the UK GDP, industrial and manufacturing production as well as trade data for May. Market consensus expects more evidence that the economy rebounded following the relaxation of the pandemic restrictions in Q2. That said, we think that caution is warranted, given that the same data for April disappointed the bullish market consensus a month or so ago. It further remains to be seen whether any positive surprises today could do much to prop up the beleaguered GBP, especially given that the UK economic recovery is expected to slow down from here.

CAD: Labour data due While more unstable risk sentiment and weaker oil prices have been keeping the CAD on the defensive this week, the currency still managed to outperform its commodity peers, partly on the back of more supported central bank monetary policy expectations. On the day, the focus will turn back to data with June employment data scheduled to be released. At 175K (prev. -68K) and at 7.8% (prev. 8.2%), consensus expectations target improving conditions as reflected in 2 healthy job creation and lower unemployment rate, each respectively. So much should prove sufficient for keeping rate outlook supported and may remain one source of support for the currency.