Dollar Continues to Consolidate Ahead of Key Central Bank Meetings

January 22, 2024

Win Thin

Fed easing expectations have adjusted a bit; the U.S. economy remains robust; only December leading index will be reported
France reported weak December retail sales; reports suggest U.K. Chancellor Hunt will have up to GBP10 bln cushion for his March 6 budget
The two-day BOJ meeting began today; Taiwan reported weak December export orders

The dollar continues to consolidate as the new week begins. With several DM (BOJ, BOC, ECB, Norges Bank) and EM (South Africa, Turkey, Malaysia) central banks meeting this week, markets should get livelier after this quiet start. DXY is trading flat near 103.239 after trading last week at the highest since December 13 near 103.692. The 200-day moving average near 103.456 is still providing some resistance but we believe DXY is on track to test the December 8 high near 104.263. The euro is trading lower near $1.0885, and sterling is trading flat near $1.2710. USD/JPY is trading lower just below 148 as the two-day BOJ meeting got under way (see below). The pair is likely to move higher if the BOJ delivers a dovish hold tomorrow as we expect. All indications are that the U.S. economy remains robust in Q4 and likely to remain so in Q1 2024. Over the past few weeks, the data have mostly come in on the firm side and so we continue to believe that the current market easing expectations still need to adjust significantly. These expectations have started to shift but more needs to be seen.

AMERICAS

Fed easing expectations have adjusted a bit. The swaps market is pricing in 125 bp of easing over the course of 2024 vs. nearly 175 bp seen earlier this month. Odds of a March cut have fallen to 50%, while a May cut is priced in, which seems very unlikely to us in light of U.S. economic strength. By contrast, the December Dot Plots imply 75 bp of rate cuts this year, which seems more reasonable. If the data remain firm as we expect, there is room for Fed funds future pricing to converge towards the FOMC’s projections and support a firmer dollar. Due to the media blackout, there are no Fed speakers this week.

The U.S. economy remains robust. Both the Atlanta Fed GDPNow and New York Fed Nowcast models forecast Q4 growth at 2.4% SAAR. Official Q4 GDP data will be reported Thursday. Growth is expected at 2.0% SAAR vs. 4.9% in Q3, with personal consumption expected at 2.5% SAAR vs. 3.1% in Q3. The risks are clearly skewed to the upside. December Chicago Fed National Activity Index will be reported Thursday too. The Atlanta Fed will begin estimating Q1 growth Friday, while the New York Fed currently estimates Q1 growth at 2.4% SAAR and will also be reported Friday.

Only December leading index will be reported today. it is expected at -0.3% m/m vs. -0.5% in November. Unfortunately, this series has lost all of its predictive power as it has been deeply negative y/y since mid-2022 even as the economy continues to grow above trend.

EUROPE/MIDDLE EAST/AFRICA

France reported weak December retail sales. Sales came in a -2.4% y/y vs. a revised -3.7% (was -3.8%) in November. France is the first of the major eurozone economies to report sales. Germany and Spain report next week, while Italy and the eurozone report the week after next. Weak data have led the market to look for the ECB to start cutting rates in Q2, with nearly 150 bp of total easing seen this year. The ECB is likely to push back against suggest aggressive market pricing when it announces its decision Thursday.

Reports suggest U.K. Chancellor Hunt will have up to GBP10 bln cushion for his March 6 budget. The FT reports that the Office of Budget Responsibility will forecast that due to lower borrowing costs, Hunt will have GBP6-10 bln of headroom below his fiscal targets, which could be used to fund some modest tax relief in his budget. Other reports suggest Hunt is also mulling some spending cuts to fund tax cuts as the Tories try to win back some support ahead of general elections. The market is still looking for the first rate cut in Q2, with nearly 125 bp of total easing seen this year. This too could help the Tories.

ASIA

The two-day Bank of Japan meeting began today. No policy changes are anticipated and Japan’s encouraging disinflation backdrop suggests the BOJ can afford to be patient with policy normalization. We expect Governor Ueda to maintain a dovish tone. WIRP suggests liftoff is not priced in until July. Reports suggest the BOJ will cut its inflation forecasts, which could further weigh on Japan’s OIS curve and JPY. Of note, the yen tends to weaken on BOJ decision days. It has done so for the past six straight and seven of the past eight.

Taiwan reported weak December export orders. Orders plunged -16.0% y/y vs. -1.0% expected and 1.0% in November. This was the worst reading since June. Orders from China came in at -3.5% y/y and is no surprise. However, orders from the U.S. (-21.6% y/y), Europe (-39.4% y/y), and Japan (-30.5% y/y) are very concerning. IP will be reported tomorrow and is expected at -0.3% y/y vs. -2.48% in November. With the mainland economy still struggling and now some weakness in DM being seen, Taiwan is likely to experience slow growth this year and is likely to be a good bellwether for the rest of the region. Stay tuned.

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