Dollar Consolidating Recent Gains

• The US JOLTS is today’s data highlight and there are plenty of Fed speakers.

• Crude oil prices rose to the highest level since October 2023. A further expansion in global manufacturing activity can boost crude oil prices.

• Chile central bank meets today and is expected to cut rates 75bps to 6.50%.

USD and Treasury yields are consolidating yesterday’s gains triggered by the solid US March ISM manufacturing data. US manufacturing activity expanded for the first time since September 2022 and the prices paid component rose further into inflationary territory. The strength of the US economy and sticky underlying inflation mean the Fed can afford to stay on the sidelines for longer than is currently discounted by the money market. Fed funds futures imply 63% odds of a first 25bps cut in June and a total of 68bps of easing this year. We expect USD to benefit further from a reassessment in Fed funds rate expectations.

The US February Job Openings and Labor Turnover Summary (JOLTS) is today’s data highlight (10:00am New York). US job openings are anticipated to continue trending lower in February but not enough to lead to a higher unemployment rate. The job opening rate fell from a high of 7.4% in March 2022 to 5.3% in January 2024. According to research by Fed Governor Christopher Waller the job opening would need to fall below 4.5% to see a significant increase in the unemployment rate.

There are plenty of Fed speakers today. Fed Governor Michelle Bowman talks on the implications of bank mergers, acquisitions, and de novo bank formation for the future of the banking system (10:10am New York); New York Fed President John Williams moderates a discussion with Jeremy Siegel, professor of finance at the Wharton School (12:00pm New York); Cleveland Fed President Loretta Mester (voter) gives remarks on the economic outlook (12:05pm New York); and San Francisco Fed President Mary Daly (voter) participates in a fireside chat (1:30pm New York).

Crude oil prices rose to the highest level since October 2023. Escalating tension in the Middle East and the prospect of lower crude oil exports from Mexico fuelled the latest rally in crude oil prices. A further improvement above the 50 boom/bust level in the global manufacturing PMI today can offer crude oil prices an additional tailwind (11:00am New York).

EUR/USD is heavy around 1.0730. The ECB’s consumer inflation expectations survey and the Eurozone manufacturing PMI reinforce the case for a June policy rate cut (93% priced-in). Median inflation expectations one year ahead fell from 3.3% in January to 3.1% in February, lowest since February 2022, and median three-year ahead inflation expectations remain well-anchored at 2.5%.

The Eurozone final manufacturing PMI printed at 46.1 in March up from a preliminary reading of 45.7. Regardless, the data continued to signal contraction within the manufacturing industry. Germany’s March CPI data (8:00am New York) will offer a preview of Thursday’s Eurozone March CPI print. German EU harmonized inflation is anticipated to slow at an annual pace of 2.4% in March from 2.7% in February. Softer than expected inflation in France, Spain and Italy points to downside risk to German inflation.

GBP/USD retraced some of its recent losses on encouraging UK economic activity. The S&P Global UK manufacturing PMI rose to a 20-month high of 50.3 in March, up from the earlier flash estimate of 49.9. This was the first time the PMI has posted above the neutral 50.0 mark since July 2022.

The recovery in UK housing market activity hit a speedbump in March. Nationwide house prices unexpectedly fell by 0.2%/mth (consensus: +0.3%) to be up 1.6% year-over-year from 1.2% in February. However, indicator of future borrowing points to further rise in house prices. UK net mortgage approvals for house purchases rose from 56,100 in January to 60,400 in February, the highest since September 2022.

UK BRC shop price inflation cooled sharply from 2.5% y/y in February to 1.3% y/y in March, lowest since December 2021. Shop price disinflation is unlikely to convince the BOE to move early with policy rate cuts. The BOE is more concerned with high and sticky services inflation.

AUD/USD recovered above 0.6500. The RBA March meeting minutes confirmed the bank no longer has a tightening bias. Unlike at the February policy meeting, there was no discussion on whether to raise the cash rate target at the March meeting. Instead, “members agreed that it was appropriate to characterise the policy outlook as one in which it was difficult to either rule in or out future changes in the cash rate target”. RBA cash rate futures continue to imply a little less than 50bps of policy rate cuts in 2024.

The RBA will tweak its policy implementation process. But this has no implications for the stance of monetary policy. The RBA plans later in the year to no longer maintain the current ‘floor’ system with excess reserves approach because it would necessitate a relatively large balance sheet on an ongoing basis. Instead, the RBA endorsed an ample reserves system in which banks’ demands for reserves are satisfied via open market repo operations at a price near the cash rate target (similar approach to BOE, ECB and Riksbank). This system is simpler to operate and reduces the risk of unnecessary volatility or disruption to conditions in money markets.

USD/JPY is range-bound around 151.70. Japanese Finance Minister Shunichi Suzuki warned again he “won’t rule out any option against excessive FX moves”. The BOJ last officially intervened to stem JPY weakness between September and October 2022. 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. The next major technical resistance for USD/JPY after the 151.95-152.00 zone is not before 160.00 (April 1990 high).

CHF is underperforming all major currencies. Switzerland’s PMIs validate the case for additional SNB policy rate cuts. The services PMI fell in March considerably below the growth threshold to 47.6 from 53.0 in February. The manufacturing PMI improved to 45.2 in March (consensus: 45.0) from 44.0 in February but still indicates contraction in manufacturing activity and manufacturing purchase prices fell further into disinflationary territory.

NOK is firmer on higher crude oil prices. Norway’s manufacturing PMI dipped from 52.0 in February to 50.8 in March, a four-month low, supporting money market pricing of a Norges Bank policy rate cut over Q3. This is a headwind for NOK.

SEK ignored the improvement in Sweden manufacturing activity. The manufacturing PMI rose to 50 in March (consensus: 49.5) from 49.2 in February. However, the level indicates weak growth going forward. Interest rate futures continue to price-in over 70% probability of 25bps Riksbank policy rate cut in May.

Chile central bank meets today and is expected to cut rates 75bps to 6.50% (5:00pm New York). A couple of analysts look for a larger 100bps cut. At the last meeting January 31, the bank cut rates 100bps to 7.25%. The vote was 4-1, with the dissent in favor of a larger 125bps cut. The bank said that the policy rate would hit the neutral level in H2. Since then, the peso has weakened 5% against the dollar and inflation unexpectedly accelerated to 4.5% y/y in February, the highest since November and back above the 2-4% target range. This argues for caution by the central bank. However, the market is pricing in 225bps of easing over the next year.