A Tale of Two Dollars

• USD is down mostly against the commodity sensitive currencies. USD is firm against the low yielding currencies (JPY and CHF).

• Cooler inflation in Switzerland opens the door for a more aggressive SNB easing cycle. CHF is underperforming across the board.

• The ECB March meeting Account will likely show broad agreement to cut rates in June.

• Poland’s central bank is widely expected to keep the policy rate at 5.75%.

USD is under downside pressure mostly against the commodity sensitive currencies. NOK, SEK, AUD, and NZD are the top performing major currencies versus USD this week. China’s modest cyclical recovery and improving global manufacturing sector growth momentum (the global manufacturing PMI rose to a 20-month high at 50.6 in March) bode well for the commodity complex. Meanwhile, USD is firm against low yielding currencies (JPY and CHF) underpinned by high US Treasury yields.

Slower US service sector growth momentum in March has kept odds of a June Fed funds rate cut well in play (over 60% priced-in) and curtailed broad USD strength. Nonetheless, the US economy is still as good as it gets. Both the manufacturing and service sectors are expanding, and the labour market is resilient. Moreover, financial conditions continue to loosen. The Chicago Fed financial conditions index decreased to -0.51 in the week ending March 29, the lowest since January 2022. Bottom line: we doubt the Fed will ease as aggressively as implied by interest rate future futures (70bps of cuts in 2024).

Today, the March Challenger job cuts (7:30am New York) and weekly jobless claims (8:30am New York) will offer additional labour market insights ahead of tomorrow’s policy-relevant non-farm payrolls report. Yesterday’s bigger than expected increase in ADP private sector jobs points to upside risk to the March non-farm payrolls print (consensus: +213k).

Fed Chair Jay Powell stuck to the script in yesterday’s speech. Powell reiterated it was “appropriate to begin lowering the policy rate at some point this year” but there is no rush to pull the trigger “given the strength of the economy and progress on inflation so far”.

There are plenty more Fed speakers today: Philadelphia Fed President Patrick Harker (non-voter) participates in a fireside chat about second chance employment (10:00am New York). Richmond Fed President Thomas Barkin delivers a speech on the economic outlook (12:00pm New York). Chicago Fed President Austan Goolsbee (non-voter) takes part in a moderated Q&A (12:45pm New York). Goolsbee is one of nine who voted for 3 cuts in 2024. Cleveland Fed President Loretta Mester (voter) speaks on the economic outlook (2:00pm New York). Mester sees 3 rate cuts in 2024 as reasonable expectation. Minneapolis Fed President Neel Kashkari (non-voter) talks on the economy and other wide-ranging topics (2:00pm New York).

CHF underperformed across the board as cooler inflation in Switzerland opens the door for a more aggressive SNB easing cycle. Annual headline CPI inflation unexpectedly slowed to 1% in March (consensus: 1.3%). This is the lowest rate of inflation since September 2021 and below the SNB’s Q1 projection of 1.2%. Moreover, core CPI inflation dropped to more than a two-year low at 1% y/y (consensus: 1.2%). Money market price-in a little over 50bps of SNB cuts over the next 12 months.

EUR/USD rallied above its 200-day moving average near 1.0844 largely on USD weakness. In the Eurozone, the final March services PMI moved deeper into expansion territory to 51.5 from a ‘flash’ reading of 51.1 and producer prices fell 8.3% y/y (-1% m/m) in February indicating the disinflationary process is well on track. The ECB March meeting Account (7:30am New York) will likely show broad agreement to cut rates in June (85% priced-in) and limit EUR relief rallies. Recall, the ECB kept policy interest rates steady in March but slashed near-term inflation and GDP growth forecasts paving the way for looser policy settings.

GBP/USD is consolidating near recent highs around 1.2660. UK economic data released this morning support the case for the BOE to start easing in August (fully priced-in). The recovery in UK service sector activity lost momentum in March as the final PMI printed at 53.1, a little less than the ‘flash’ reading of 53.4. Also, the BOE March DMP survey showed inflation and wage growth expectations easing. 1-year ahead inflation expectations fell 0.1pts to a new low at 3.2% and 3-year ahead inflation expectation printed at 2.7% for a third consecutive month in March. Expected year-ahead wage growth declined to 4.7% adding confidence that a sustained slowdown in average regular earnings growth is underway.

SEK is holding on to recent gains. The Riksbank Minutes of the March policy meeting showed unanimous agreement for a first cut in either May or June. Interestingly, Governor Erik Thedéen seemed to favour May noting “one reason to potentially begin cutting the rate in May is that we would then have greater flexibility to proceed cautiously with further adjustments to the interest rate”. Money market price-in roughly 50% probability of a 25bps Riksbank policy rate cut in May and June.

PLN is firm ahead of the National Bank of Poland (NBP) policy rate decision (no set time but usually between 8:00 and 10:00am New York). NBP is widely expected to keep the policy rate at 5.75% and reiterate its neutral guidance that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term”. Indeed, NBP policymakers Iwona Duda noted “I don’t see room for interest rate cuts this year” while Gabriela Maslowska said “I think it will be possible to think about rate cuts in the second half of next year or early 2026”.

Interest rate futures imply just 25bps of NBP rate cuts over the next 12 months. The risk in our view is NBP delivers more easing than is currently priced-in which is a headwind for PLN. Inflation is near the middle of the central bank’s 1.5-3.5% target range and domestic demand activity weak. Nevertheless, escalating tension between the government and the central bank governor complicates the policy rate path projection.

USD/MXN is consolidating above key support at 16.5000. Banco de Mexico March policy meeting Minutes is the domestic highlight (11:00am New York). Recall, Banco de Mexico cut the policy rate by 25bps to 11.00% (widely anticipated). This was the first cut since 2021 and the vote was 4-1 (Espinosa dissented in favor of steady rates), suggesting the easing cycle should continue without much resistance. The swaps market is pricing in 150bps of easing over the next 12 months.

AUD and NZD are outperforming most major currencies. In Australia, the number of dwellings approved unexpectedly declined 1.9% m/m in February (consensus: +3%) driven by a fall in the number of approved large apartment projects. This follows a downwardly revised 2.5% drop in January. The downtrend in building approvals will further constrain the supply of new dwellings and push house prices higher. In New Zealand, the number of new dwellings consented rose 14.9% m/m in February, after falling 8.6% in January. Regardless, high mortgage interest rates and high construction costs suggest residential investment will remain a drag to NZ growth.