Written by the Market Insights Team
Uneasy tranquility
Kevin Ford – FX & Macro Strategist
The 1-month at-the-money (ATM) implied volatility for the Canadian dollar has dipped below its 2024 average, indicating a quieter outlook in FX markets. Following a busy macro week in both Canada and the US, traders are preparing for a relatively calm transition into summer, with no major catalysts expected, aside from a potential uptick in US inflation for May, set to be revealed this Wednesday. Meanwhile, reports suggesting an increase in defense spending by Prime Minister Carney have failed to make an impression in FX and equity markets. However, the 10-year government bond yield has responded to the upside, reflecting growing concerns over a rising debt-to-GDP ratio and its implications for Canada’s long-term fiscal outlook. Investors will be watching closely to see how these dynamics unfold ahead of the G7 summit, scheduled to start this Sunday in Alberta, Canada.
The CAD has been fluctuating, hovering closer to the 1.37 level, struggling to stay below 1.365. While broader US dollar bearish sentiment remains the dominant force in FX markets, short-term yield differentials continue to be a key concern for the Loonie bulls, especially if sentiment shifts on a hotter-than-expected US CPI release.
Sell America: weak dollar, steep curve
Antonio Ruggiero – FX & Macro Strategist
Dollar bearishness looks set to persist, as monetary policy—once the key pillar of support for the greenback—ceased playing that role in April. The only potential upside for the dollar this week hinges on US-China trade negotiations in London, though no significant outcome has been revealed yet. Until then, with no major data releases before Wednesday’s CPI report, DXY is likely to drift lower, down nearly 9% year-to-date, reinforcing the lingering Sell America sentiment in markets.
Meanwhile, expectations for a firmer May CPI print are keeping the short end of the 1y-30y Treasury curve anchored at around 100 basis points, with traders holding off on bets for imminent Fed rate cuts. The result is a yield curve that remains steep, reflecting persistent inflation risks at the front end and fiscal or duration concerns further out.
DXY held above the 99 handle as ongoing US-China negotiations in London, despite no major developments yet, signaled broad satisfaction from both sides regarding the progress made so far. Kevin Hassett, head of the White House’s National Economic Council, told CNBC that “after the handshake” in London, “any export controls from the US will be eased and the rare earths will be released in volume” by China. Despite signaling US openness to concessions, Hassett made it clear that the most advanced US semiconductor technology—particularly Nvidia Corp.’s AI-powering chips—would remain restricted, underscoring the ongoing Indo-American race in AI dominance. Given the significance of these talks, a meaningful step toward a trade-supportive deal could push the dollar toward the key 100 level. However, for DXY to sustain levels above 100 with confidence, a more substantial agreement—alongside progress in trade negotiations with other partners—would be necessary.
USD/MXN hits lowest since Sep ‘24
Kevin Ford – FX & Macro Strategist
According to figures from Mexico’s National Institute of Statistics and Geography (INEGI), annual inflation in May 2025 reached 4.42%, the highest in six months, exceeding the upper limit of the target set by the Bank of Mexico (Banxico). This latest figure came in higher than the 4.38% average forecast by economists surveyed by Bloomberg and marked a noticeable increase from the 3.93% recorded in April. Core inflation, which excludes highly volatile items like food and fuel, also saw an uptick, rising to 4.06%. Despite the sharp increase, Banxico is unlikely to alter its easing cycle path, given that much of the surge was driven by non-core components.
The Mexican peso is kicking off the week with continued strength, extending its impressive 2025 rally. Looking back, the peso depreciated in the months following Trump’s first election in 2015 but managed to recover all its losses within a year. Fast forward to today, and the peso has gained roughly 4.8% since the most recent elections, bringing its year-to-date rise to nearly 10%. This momentum is particularly notable given the shifting macro landscape. What stands out in 2025 is the strong demand for carry currencies, those that benefit from high-interest rate differentials, where the peso has taken the lead alongside the Brazilian real among Latin American currencies. Investors are keeping a close eye on this trend, as it underscores the peso’s resilience amid a challenging domestic backdrop and the evolving economic relationship between the U.S. and Mexico.
Euro bulls step up
Antonio Ruggiero – FX & Macro Strategist
The euro remains resilient, starting the week in the $1.14 zone following Lagarde’s unexpectedly hawkish remarks last week. However, with yesterday’s Whit Monday public holiday across major Northern European countries, trading began on a subdued note, with few directional cues to guide early price action. Key bearish drivers for the euro this week include positive US-China trade negotiations and soft economic fundamentals in the euro area, with CPI data for Spain, Germany, and France, as well as industrial production figures at the aggregate level, taking center stage ahead of Friday’s releases. Overall, euro appetite remains solid, particularly in longer-term maturities within the options market, as the spread between the 1-year and 1-month 25% delta EUR/USD risk reversal recently turned positive for the first time since 2022, signaling growing long-term bullish sentiment.
However, this optimism remains largely fueled by US economic weakness, rather than underlying euro strength. Markets continue to price in one more ECB rate cut before year-end (December), and while the Fed may adopt a more dovish stance, rate differentials will still favor the dollar. The potential pivot point for the euro lies in inflation dynamics—if US inflation accelerates while remaining subdued in Europe, real rate differentials could turn euro-supportive. A crucial factor in this narrative will be whether the inflationary impact of tariffs proves temporary or more persistent.
Germany’s upcoming budget announcement later this month, as part of broader fiscal expansion efforts, alongside US CPI data due Wednesday, expected to come in hot, could provide early signals of a shift in (real) US-Eurozone rate divergence, potentially supporting the euro.
Pound slips after UK wage growth miss
George Vessey – Lead FX & Macro Strategist
The pound is marginally lower this morning after the UK labour market report revealed wages grew less than expected, whilst employment plunged. Although the ONS’s persistent data collection issues mean figures should be viewed cautiously, it might give the Bank of England (BoE) confidence that interest rates can be cut further this year.
Pay growth excluding bonuses eased to 5.2%, its slowest pace in seven months, and below forecasts of 5.3%. Private-sector wage growth, closely watched by the BoE, slipped to 5.1% from 5.5%. Still, wage growth momentum remains stubborn and inconsistent with the BoE’s 2% inflation target. Job vacancies declined though as businesses adjusted to higher payroll taxes and minimum wage hikes from April’s budget and separate tax data showed payroll employment fell by 109,000 in May, the biggest drop since May 2020, all of which are reinforcing signs of labour market cooling. The BoE meets next week, but no cut is expected, and markets are still only pricing in less than two more cuts by year-end.
Before the next UK data dump on Thursday, focus will also be on UK Chancellor Rachel Reeves Spending Review tomorrow. While Wednesday’s Spending Review is not a budget, and tax changes are off the table, it remains an important test of government credibility. Markets will be watching closely to ensure that the UK’s debt trajectory remains sustainable.
If concerns over fiscal discipline emerge, UK bond yields could push higher, as investors demand greater compensation for holding long-term UK debt. Historically, this has supported sterling, as higher yields attract foreign inflows. However, in times of elevated uncertainty bond yields and the pound can decouple, potentially signalling broader market unease. For now, the risk of a confidence crisis appears low, meaning sterling should navigate Wednesday without major disruptions. Still, any policy missteps or signs of weakened fiscal discipline could be punished swiftly, leaving GBP/USD vulnerable to a pullback.
USD/MXN hits the lowest in 9-months
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 9-13
All times are in ET
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
Leave a Reply