Inflation is Still Here The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used or considered as an inducement to engage in any investment. The macro point Many electoral deadlines this week with the second round of legislative elections in France and the general election on July 4 in the United Kingdom. This may create volatility. But the real issue is the return of inflationary pressures. It was thought that the battle against high inflation was almost won. In reality, it's more complicated than it seems. In Canada, inflation surprised on the upside, rising by 2.9% year-on-year in May compared to the 2.6% anticipated. It's likely that the Bank of Canada will think twice before cutting rates again. The same is true in Australia to the point where the money market now anticipates that the Australian central bank... could raise its rates in August! Why are we interested in Canada and Australia? They are two small open economies that are generally good leading indicators of cyclical changes in the global economy. The message being sent is clear: inflationary pressures are still present. Just one example: the cost of maritime freight continues to climb to $4,510 from $1,200 at the end of 2023. For now, inflationary pressures should not have consequences on the direction of monetary policy in Europe and the United States. In Europe, it is assumed that the European Central Bank (ECB) will cut its rates by 25 basis points in September. In the United Kingdom, an initial rate cut seems conceivable in August in view of the easing observed in the labor market. We also believe that the Federal Reserve (Fed) will lower its key interest rate on at least one occasion this year. The timetable is more complicated due to the US presidential election. If we only considered macroeconomics, a rate cut would be ideal in December – the US economy doesn't need immediate support. But that risks facing a complex political situation if the November election is contested. The least bad scenario, in our view, involves a 25 basis point rate cut in September followed by a pause until the start of 2025. Here and there, inflationary pressures could also delay the easing cycle. A research paper published by the ECB last week, for example, indicates that we might have to wait a bit longer before declaring victory over inflation. In Japan, authorities keep warning against the yen's collapse against the US dollar (and to a lesser extent against the euro). So far, this has had no effect on the foreign exchange market. The weekly report from the CFTC (the equivalent of the US stock market regulator) confirms that institutional investors are still positioned to sell the yen. We increasingly doubt that Japan truly desires a strong yen. As long as retail sales are somewhat sluggish, the Japanese economy is primarily driven by exports, which depend partly on the exchange rate effect. It was indeed exports that kept the archipelago from falling into recession at the beginning of the year. From our point of view, the best Japan can hope for is a stabilization of the yen... at a very low level. This was the case during the global financial crisis. For the EUR/JPY, this means stabilization within a range of 167 to 170 – which seems optimal to us. This is our central scenario. Nonetheless, nothing can be excluded, which is why it's important to adapt one's currency hedging if exposed to the Japanese currency. Finally, good news for the yuan. The internationalization of the Chinese currency continues. It had experienced an abrupt halt following the triple devaluation in August 2015. According to Chinese customs data published last week, the share of goods and services paid in CNH by the country is 30% higher than its 2015 peak. Technical point The main phenomenon occurring on the market is the end of the carry trade. Carry trade strategies need two essential conditions to succeed: a strong divergence in rates and low volatility. These conditions are no longer optimally met now. The rate differential has compressed between major economies, and a more uncertain macroeconomic context has also led to a return of volatility. It is expected to continue increasing in the second half of the year with the emergence of political risk (particularly the U.S. presidential election). This context, however, is very favorable for the U.S. dollar, which offers a higher yield than 62% of currencies in the foreign exchange market, according to Bloomberg. We are therefore still bullish for the dollar against the main G10 currencies, including the euro. For EUR/USD, this should translate into a decline towards 1.05. The supports and resistances shown below respectively indicate the low and high points within which the courses should evolve during the week.Weekly SupportsWeekly ResistancesS2S1R1R2EUR/USD1.05541.06011.08121.0900EUR/GBP0.83110.83330.86550.8688EUR/CHF0.93880.94120.96450.9701EUR/CAD1.44771.45111.47871.4867EUR/JPY167.88169.11171.99172.56 Announcements to follow Last week was rather quiet on the data front. This will not be the case this week. U.S. employment is certainly the most important statistic to watch. Advanced data indicates a slowdown in job dynamics and wage increases. If this is confirmed, it's rather good news for the Fed, which could lower its rates in September. Politics will also be present with the second round of legislative elections in France (do not overestimate the effect on the foreign exchange market!) and the general election on July 4 in the United Kingdom (minimal effect on the pound sterling). Below you will find the publications and events that should have a major impact on currency exchange rates.DayTimeCountryIndicatorWhat to expect?02/07/202411:00EURConsumer Price Index (May)Previous at 2.6% year-on-year.03/07/202414:30USAADP Non-Farm Employment Change (June)Previous at 152K.05/07/202414:30USAEmployment figures by the Department of Labor (June)Previous at 272K.