King Dollar is Back

October 03, 2024

King Dollar is Back

  • The dollar’s dominance as an international currency means it performs well during periods of risk aversion.
  • BOE Governor Bailey warns of the possibility of more aggressive rate cuts.
  • Swiss CPI undershoots expectations, raising odds SNB dials-up easing.

USD is powering forward against all major currencies as markets brace for Israel’s counteraction to Tuesday’s ballistic missile attack by Iran. Israel’s response is expected to be less restrained than in April, potentially targeting Iran’s oil infrastructure and/or nuclear facilities. Meanwhile, crude oil prices are holding on to recent gains, gold prices are firm near record highs, and U.S. equity futures are slightly lower.

U.S. data releases today will likely show the economy remains in a good place. The ISM services index is projected to print at 51.7 vs. 51.5 in August (3:00pm London). The ISM services employment sub-component, Challenger job cut announcement (12:30pm London) and weekly jobless claims (1:30pm London) will offer more timely insights about the slowdown in the labor market.

GBP is underperforming following dovish comments by Bank of England Governor Andrew Bailey. In an interview with the Guardian newspaper, Bailey held out the prospect of the Bank becoming a “bit more aggressive” in cutting interest rates provided the news on inflation continued to be good. BOE is widely expected to cut the policy rate 25 bp at the next November 7 meeting and odds of a follow-up cut in December increased.

The September U.K. Decision Maker Panel (DMP) inflation expectations survey is the domestic data highlight (9:30am London). 1-year inflation expectations are expected to rise a tick to 2.7% but would remain near the lows since this series began in 2022. 3-year inflation expectations stood at 2.7% in August and still within the same narrow range that’s held throughout the year. Overall, inflation expectations are contained and do not move the dial on BOE easing expectations.

CHF weakened after Swiss September inflation undershoots expectations. Headline CPI fell -0.3% m/m (consensus: -0.1%), the biggest monthly decline since April 2020, to be down 0.8% y/y (consensus and SNB Q3 forecast: 1.1%) vs. 1.1% in August. Core CPI dropped -0.2% m/m and eased one tick to 1% y/y (consensus: 1.1%). The sharp decrease in inflation raises the probability of a 50 bp cut at the next December Swiss National Bank meeting. Regardless, CHF downside is limited as the fog of war continues to dominate financial markets.

EUR/USD is edging lower on broad USD strength and nearing key technical support at 1.1000. ECB policymakers continue to set the stage for an easier policy stance. Yesterday, Executive Board member Isabel Schnabel said that officials “cannot ignore the headwinds to growth.” Vice President Luis de Guindos warned that “Europe is in a low growth situation, and risks are to the downside.” Finally, Governing Council member Mario Centeno noted “the current state of the euro-area economy…necessitates a response from the ECB: a reduction in interest rates.” Eurozone July PPI is up next (9:00am London).

USD/JPY is building on yesterday’s gains and Japanese stocks are up as the Bank of Japan (BOJ) is seen keeping policy loose for longer. Japan Prime Minister Shigeru Ishiba emphasized yesterday “I don’t think the environment is ready for an additional rate hike”. And overnight, BOJ member Asahi Noguchi cautioned “I believe it is most important to continue to patiently maintain accommodative financial conditions.” Noguchi’s dovish comments are not surprising as he was one of two BOJ members that voted against raising the policy rate in July.

NZD is down against most major currencies. The RBNZ is expected to follow-up on the 25 bp Official Cash Rate (OCR) cut delivered in August with a 50 bp OCR reduction to 4.75% next week. The swaps market implies 75% odds of a 50 bp cut while the vast majority of analysts surveyed by Bloomberg have a 50 bp cut penciled-in. The RBNZ policy stance is too tight, heightening the risk a deeper economic downturn. In fact, the OCR is well above the RBNZ’s estimate for the nominal neutral rate range of 2 and 4%.

PLN will partly be driven today by National Bank of Poland (NBP) Governor Adam Glapinski post-meeting press conference (2:00pm London). Yesterday, NBP delivered on expectations and left the key policy rate steady at 5.75%. The risk is Glapinski further softens his policy stance. Several MPC members (Kotecki, Duda, Dabrowski, and Litwiniuk) turned more dovish throughout September arguing for the possibility of a March 2025 rate cut at the earliest. Kotecki and Wnorowski even suggested 100 bp of cuts over 2025 is likely. The swaps market has more than fully priced-in 75 bp of easing over the next 12 months.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com



captcha image ↻

Type in the word seen on the picture

I am a current investor in another jurisdiction

1 of 2

2 of 2