• The resilience in the dollar is noteworthy; the price action just goes to show how important the relative story is for FX; Fed speakers today will be keenly watched; Canada highlight will be January retail sales data; Mexico reports mid-March CPI; Colombia is expected to cut rates 50 bp to 12.25%
  
• BOE delivered a dovish hold; U.K. reported solid February retail sales data; ECB officials continue to manage market expectations; Germany reported a firm March IFO business climate survey
  
• Japan reported February national CPI; RBA released its Financial Stability Review; New Zealand reported strong February trade data; yuan weakness is picking up; BOT may pivot at the next meeting April 10

The dollar continues to gain despite the dovish Fed theme. DXY is trading at the highest since mid-February near 104.428 and is on track to test the February 14 high just below 105. Despite the market’s dovish take on the Fed, the current price action underscores that the relative story is really matters for FX (see below). The euro is trading lower near $1.0820 while sterling is trading lower near $1.2585 in the wake of the BOE’s dovish hold (see below). Both CHF and GBP had bearish engulfing days yesterday, pointing to further losses ahead. USD/JPY is trading flat near 151.60 as officials express concern about the weak yen (see below). The dollar recovery should continue, not just on dovish developments from other central banks but also from Fed repricing. The U.S. data continue to come in mostly firmer and it’s clear from the Dot Plots that most Fed officials remain very cautious about easing too much or too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain even further.

AMERICAS

The resilience in the dollar is noteworthy. DXY is trading higher than it was before the FOMC decision. However, the performances of individual currencies are more nuanced and driven in large part by central bank surprises. CHF is one of the worst performing majors this week after the SNB unexpectedly became the first major central bank to cut rates. JPY is right behind it despite hiking rates for the first time since 2007, as the BOJ offered very dovish forward guidance. GBP is coming under pressure after the BOE delivered a dovish hold and moved closer to starting an easing cycle. Lastly, AUD is coming under greater pressure after delivering a dovish hold.

The price action just goes to show how important the relative story is for FX. Despite the market's dovish take on the Fed, developments in the rest of the world have helped maintain the dollar’s relative attractiveness. We still believe the dovish Fed take is wrong, and so the greenback should see another leg higher when market expectations adjust.

Fed speakers today will be keenly watched. Chair Powell will deliver opening remarks at a Fed Listens event with a discussion moderated by Vice Chair Jefferson and Governor Bowman. Later, Vice Chair for Supervision Barr participates at an event on International Economic and Monetary Design. Finally, Atlanta Fed President Bostic, a 2024 voter, participates in a moderated conversation about household finance. As always, there is a risk that Powell sends a dovish message.

Q1 GDP forecasts are getting marked down. The New York Fed’s Nowcast model is tracking Q1 growth at 1.8% SAAR, down from 2.1% previously. Looking ahead, it is now tracking Q2 growth at 2.1% SAAR, down from 2.5% previously. This model will be updated today.  Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.1% SAAR and will be updated next Tuesday after the data.

Canada highlight will be January retail sales data. Statistics Canada’s advance retail indicator suggests sales decreased -0.4% m/m in January following a 0.9% increase the previous month. With activity softening and inflation falling, markets have adjusted Bank of Canada easing expectations. While a cut at the next meeting April 10 is very unlikely, the odds of a cut June 5 are now above 80% vs. less than 50% a week ago.

Mexico reports mid-March CPI. Headline is expected at 4.44% y/y vs. 4.35% previously, while core is expected at 4.63% y/y vs. 4.66% previously. Yesterday, Banco de Mexico cut rates 25 bp to 11.0% as expected. It was the first cut after keeping the rate on hold at 11.25% since August 2023. The vote was 4-1, with Espinosa dissenting in favor of steady rates. This suggests the easing cycle should continue without much resistance. The swaps market is pricing in 75 bp of easing over the next 6 months followed by another 125 bp over the subsequent 6 months.

Colombia central bank is expected to cut rates 50 bp to 12.25%. At the last meeting January 31, the bank delivered a hawkish surprise and cut rates 25 bp to 12.75% vs. 50 bp expected. Governor Villar said it would ease “in a cautious way to control the risks that a more accelerated reduction will lead to a situation in which the process has to be slowed down or even eventually reversed.” Since then, headline CPI inflation fell to a two-year low of 7.74% y/y and core CPI inflation fell to a 16-month low of 9.20%. There are some risks that the central bank sticks to a more modest 25 bp pace as inflation remains well above the 2-4% target range. The swaps market is pricing 450 bp of rate cuts over the next 12 months.

EUROPE/MIDDLE EAST/AFRICA

Bank of England delivered a dovish hold. As expected, the BOE kept rates steady at 5.25%. The BOE also reiterated that “monetary policy needs to be restrictive for an extended period of time” and that it “will keep under review for how long the Bank Rate should be maintained at its current level.” Updated macro forecasts will come at the next meeting May 9. However, the dovish surprise was in the voting. The MPC split was surprisingly less hawkish, as Haskel and Mann both switched their vote from a 25 bp hike to a hold. Mann was the least likely to pivot, but she did. Dhingra maintained her preference for a 25 bp cut. Market pricing now sees nearly 85% odds of a rate cut June 20, up sharply from around 50% at the start of this week.

U.K. reported solid February retail sales data. Headline came in flat m/m vs. -0.4% expected and a revised 3.6% (was 3.4%) in January, while ex-auto fuel came in at 0.2% m/m vs. -0.1% expected and a revised 3.4% (was 3.2%) in January. Despite the upside surprises to the m/m numbers, the y/y rates worsened to -0.4% and -0.5%, respectively, vs. 0.5% for both series in January. That said, positive real wage growth, a strong labor market, a recovery in housing market activity, and improving consumer confidence all point to a favorable household spending outlook ahead as the U.K. economy remains surprisingly resilient.

ECB officials continue to manage market expectations. Earlier this week, it was Lagarde saying Our decisions will have to remain data dependent and meeting-by-meeting, responding to new information as it comes in. This implies that, even after the first rate cut, we cannot pre-commit to a particular rate path.” Today, Nagel echoed this and said “I do not see that there is a kind of an automatism. It is data dependent, and it is not a done deal that everything is going smoothly for the rest of the year or maybe for next year. So, we have to be vigilant, we have to be cautious.” As things stand, the market sees rate cuts at the June, September, and October meetings, with nearly 70% odds of a fourth cut at the December meeting. This timetable will indeed be data dependent. Holzmann, Centeno, Nagel (again), and Lane all speak later today.

Germany reported a firm March IFO business climate survey. Headline came in at 87.8 vs. 86.0 expected and a revised 85.7 (was 85.5) in February and was the highest since June 2023. Expectations came in at 87.5 vs. 84.7 expected and a revised 84.4 (was 84.1) in February, while current assessment came in at 88.1 vs. 86.8 expected and 86.9 in February. IFO official noted that “It seems that German companies do expect to benefit from this upturn in the global economy. We see order books still shrinking - so the improvements haven’t arrived - but at least companies are becoming a little more optimistic.” Despite the recent pickup in sentiment indicators, it seems Germany remains the weak link in the eurozone.

ASIA

Japan reported February national CPI. Headline came in a tick lower than expected at 2.8% y/y vs. 2.2% in January, core (ex-fresh food) came in as expected at 2.8% y/y vs. 2.0% in January, and core ex-energy came in a tick lower than expected at 3.2% y/y vs. 3.5% in January. Core accelerated for the first time since October and moved away from the 2.0% target that it briefly hit. Of note, the acceleration was largely the result of low base effects rather than an indication of a sustained reacceleration in prices. Indeed, March Tokyo CPI data out next Friday are expected to fall back a bit, with core expected at 2.4% y/y vs. 2.5% in February. With price pressures low and the BOJ in no hurry to hike rates again, we think it’s only a matter of time before USD/JPY makes new cyclical highs. In that regard, Finance Minister Shunichi Suzuki warned again he’s “watching forex moves with a high sense of urgency.”

Reserve Bank of Australia released its Financial Stability Review. The RBA noted again that the Australian financial system is proving resilient. First, nearly all household borrowers are expected to be able to continue servicing their debts even if budgetary pressures remain elevated for an extended period. Second, strong financial positions limit the risk of widespread financial stress in the business sector. Third, there is little evidence of financial stress among owners of local commercial real estate (CRE). Finally, high capital levels mean banks are well placed to absorb losses on their loan portfolios.

New Zealand reported strong February trade data. Exports rose 16.2% y/y vs. -9.3% in January, while imports rose 3.3% y/y vs. -20.2% in January. Both were the first y/y gains since May 2023, and the strong export performance led to the smallest monthly trade deficit since June 2022. Of note, the Q4 current account deficit was just reported at -6.9% of GDP vs. a revised -7.4% (was -7.6%) in Q3. The trade data so far in Q1 suggest the gap will narrow further.

Yuan weakness is picking up. Offshore USD/CNH traded as high as 7.2725 today, the highest since mid-November 2023 and on track to test the October high near 7.3470. The move was driven by signs that the PBOC may be willing to tolerate a weaker yuan, as the bank raised the daily reference rate for onshore yuan to 7.1000 vs. 7.0942 the previous day. This was the biggest move since early February. Recall that USD/CNY is allowed to trade within +/- 2% of the fix. After the daily fix, USD/CNY broke sharply above key resistance at 7.2000 (a level it had failed to breach this year) and dragged USD/CNH (offshore yuan) higher along with it. The CNH-CNY spread widened to nearly 400 pips, the most since August 2023. We believe risks are skewed towards further downside in CNH, especially as US-China spreads are widening again in the dollar’s favor.

Bank of Thailand may pivot at the next meeting April 10. Assistant Governor Piti said, “It’s hard to prejudge the decision right now, but whatever is being considered is more like a recalibration rather than an easing cycle to support the economy because the economy is actually recovering.” So far, the bank has kept rates steady since XX despite ongoing pressure from the government to cut rates. Indeed, the Finance Ministry just said that the BOT should consider cutting rats in response to lower inflation, adding that an easing cycle would help boost local demand. While we happen to agree that a rate cut is warranted, we remain uncomfortable with government pressure to do so. The swaps market is pricing in 25 bp of easing over the next three months, followed by another 25 bp over the subsequent three months.