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Three Key Fundamentals to Watch This Week



1) Bank of Canada Rate Decision on Wednesday at 1500BST/1000EDT


On Wednesday, the Bank of Canada releases the result of its latest interest rate and policy decision. No big changes to monetary policy are expected at this meeting, given that recent economic data out of Canada has shown the economy recovering from the Covid-19 hit in line with the BoC’s forecasts. We will also be getting updated economic forecasts, which will likely be slightly more upbeat than the prior set.


In terms of the tone of the statement; most analysts expect the bank to acknowledge that the economy has transitioned into the recovery phase (helped along by ample doses of fiscal stimulus) in wake of peak Covid-19 lockdown, but the overall tone will still be cautious, reflecting the downbeat tone of the recent Business Outlook Survey (released last week, the survey suggested that businesses remain very concerned around the outlook for demand).


Despite the fact that the BoC is not expected to make any policy changes, this meeting should still be an interesting one given that it is Tiff Macklem’s first in charge as Governor of the bank. Therefore, there is a risk that Macklem’s tone (i.e. his perceived levels of

optimism/pessimism on the economy and its outlook) might differ from his predecessor Poloz and trigger some unwanted CAD volatility.


2) European Central Bank Rate Decision on Thursday at 1245BST/0745EDT


On Thursday, the ECB is expected to keep its main monetary policy settings on hold, with the deposit rate to be left at -0.5% and the size of its PEPP QE programme to remain at EUR 1.35trln in total.


The main thing that EUR traders will, therefore, be interested in will be the tone of the meeting. Given better than expected recent data, as well as more upbeat commentary from various voting ECB members, many analysts expect the bank to adopt a “cautiously optimistic” stance in July, when compared to the tone of the June meeting.


Optimistic because 1) the Eurozone economy (as shown by recent data) has continued to recover from the Covid-19 pandemic a little better than expected and 2) because the Eurozone has continued to keep the spread of Covid-19 under control (unlike the US).


Cautious because 1) the Eurozone economy is still well below its pre-Covid-19 levels in terms of size and thus will need continued dovish ECB policy for the foreseeable future and 2) ECB President Lagarde will not want to give off any signals that though the economic recovery is going a little better than expected, the bank is thinking about tightening any time soon (this could cause an adverse market reaction and have a negative effect on the economy).


Should the tone of the meeting depart from “cautiously optimistic”, this could trigger some EUR volatility; the more dovish the bank is likely the better for EUR, while if they come across a little hawkish this might be a negative for EUR. Usually, the effect of dovish and hawkish on a currency would be the other way around, but with the ECB and Eurozone, there is an risk that if the ECB underdelivers on stimulus (i.e. is too hawkish) then it could lead to the breakup of the Eurozone (which is EUR negative) – so it is this risk being traded

.

3) EU Council Summit meeting on Friday


EUR traders have their hands full for a second day on Friday, but this time rather than central bank action, they will be thinking about European politics.


EU27 nations are currently locked in negotiations over the bloc’s common fiscal response to the Covid-19 pandemic.


Various proposals for the package have gained momentum; the main one being debated is the European Commission’s proposal for a EUR 750bln fund, of EUR 500bln of grants and EUR 250bln in loans, funded by the issuance of joint EU debt.


However, the frugal four (Sweden, Netherlands, Denmark, Austria) have pushed back against the proposal, and according to reports this weekend, the fund’s touted EUR 750bln size will likely not make it past the next EU Council meeting.


What markets really care about is this; are we going to get a deal soon or not? If leaders show signs of compromise, even if that means cutting the size of the fund a little, this will likely be enough to be a EUR positive. However, if deadlock continues, this will increasingly weigh on EUR. 

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