Dollar Claws Back Some Losses

April 05, 2024

Dollar Claws Back Some Losses

  • USD a little firmer ahead of today’s US March non-farm payrolls report. Canada also reports March labour market data.
  • BOJ Governor Ueda gives JPY a short-term boost.
  • Brent crude oil prices breaking on higher on heightened geopolitical tensions in the Middle East.

USD retraced some of its recent losses as more Fed officials urged patience before lowering rates. Richmond Fed President Thomas Barkin (voter) remarked “given a strong labor market, we have time for the clouds to clear before beginning the process of toggling rates down”. And Minneapolis Fed President Neel Kashkari (non-voter) raised the possibility of no Fed funds rate cut “if inflation stalls” but also indicated pencilling-in 2 cuts in 2024.

Nevertheless, Fed funds futures continue to keep a June rate cut well in play (72% priced-in) and a total of roughly 75bps of easing this year. We see scope for a reassessment in Fed funds rate expectations in favour of a firmer USD. The Atlanta Fed GDPNowcast points to robust growth of 2.47% (seasonally adjusted annual rate) for Q1 and the Chicago Fed financial conditions index is the loosest since January 2022.

Today’s US non-farm payrolls report (1:30pm London) will be an important driver of US interest rate expectations. Non-farm payrolls are projected to rise 214k in March versus 275k in February. Risks are balance. ADP private sector jobs was higher than expected but jobless claims are rising, and layoff announcements jumped in March.

The US unemployment rate is expected to dip to 3.8% in March after rising 0.2pts to 3.9% in February. As Fed Governor Christopher Waller noted the jobless rate increase in February “was driven mostly by an outsized rise in the number of 16- to 24-year-olds counted as unemployed. Youth employment tends to be volatile, so this rate may drop back in the next few months and, if so, pull the overall unemployment rate back down as well”.

The pace of US wage growth, a key driver of core services CPI inflation, will also generate a lot of attention. Consensus is for average hourly earnings to rise by 0.3% m/m and slow at an annual pace of 4.1% in March from 4.3% in February.

Fed speakers today include: Boston Fed President Susan Collins (1:30pm London), Richmond Fed President Thomas Barkin (2:15pm London), Dallas Fed President Lorie Logan (4:00pm London), and Fed Governor Michelle Bowman (5:30pm London).

JPY outperformed overnight and USD/JPY fell by over 0.50% to an intra-day low around 150.80 following comments from BOJ Governor Ueda. Ueda cautioned he sees wage growth leading to higher consumer prices and signalled a weak yen could be another factor for rate hikes. Meanwhile, Japanese Finance Minister Suzuki warned again he “won’t rule out any option against excessive FX moves”. In our view, it’s only a matter of time before USD/JPY breaks higher because we anticipate a gradual BOJ tightening process and a more muted than currently priced-in Fed easing cycle.

USD/CAD is trading near the top of a two-month 1.3400-1.3600 range. Canada’s March labour force report is the domestic highlight (1:30pm London). Consensus sees a 25k rise in jobs vs. 40.7k in February, as well as the unemployment rate rising a tick to 5.9%. Recent labor market readings have been solid, validating the BOC’s warning in March that “it’s too early to loosen the restrictive policy.”

EUR/USD is struggling to sustain a break above its 200-day moving average (1.0833). The Eurozone February retail sales print is up next (10:00am London). Retail sales volumes are expected to fall 0.4% m/m in February after a modest 0.1% increase in January, reflecting the impact of restrictive monetary policy. A June ECB policy rate cut remains fully priced-in.

AUD/USD is lower near 0.6570 on USD strength and lower iron ore prices. Iron ore futures on the Singapore exchange fell to the lowest since November 2022. China’s property slump continues to undermine iron ore prices as the property sector accounts for almost 40% of China’s steel consumption.

Brent crude oil prices rallied to multi-month highs above US$90/bbl on fears of a widening conflict in the Middle East. Israeli Prime Minister Benjamin Netanyahu said at a security cabinet meeting that his country will operate against Iran and its proxies.

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