Dollar Down, But Not Out

June 25, 2024

Dollar Down, But Not Out

  • US June forward-looking data will offer a timely update on the growth outlook.
  • A hung parliament is the most likely scenario ahead of the French legislative elections.
  • Canada reports May CPI print today. Inflation is expected to ease further.

 

USD is drifting lower against most major currencies and Treasury yields are consolidating around recent lows. In our view, the favourable US macro backdrop justifies a reassessment in Fed funds rate expectations in support of a higher USD and Treasury yields. Fed funds futures continue to price-in 50 bp of cuts by December 2024 while the Fed has only 25 bp of cut pencilled-in.

Today, a handful of regional Fed business surveys (between 1:30 and 3:30pm London) and the Conference Board consumer confidence index for June (3:00pm London) will offer a timely update on the US growth outlook. Also, Fed Governor Michelle Bowman gives a speech on US monetary policy and bank capital reform (12:00pm London). And later today, Fed Governor Lisa Cook speaks about the economic outlook (5:00pm London).

EUR/USD has recovered above 1.0700 in line with the stabilization in the premium on French bonds over German bunds. The first and second rounds of the French legislative elections are June 30 and July 7, respectively. The latest Ifop-Fiducial poll of voting intentions shows that the most likely election scenario is a hung parliament. The hard-right National Rally would get 220-260 seats out of 577 in the National Assembly; the hard left alliance would get 185-215; Macron’s centrist Ensemble group would get 70-100. A hung parliament will generate more political instability, further weighing on French bonds and EUR.

USD/CAD is grinding lower towards the bottom of its two-month 1.3600-1.3800 range on firm crude oil prices and broad USD weakness. Bank of Canada Governor Tiff Macklem talked yesterday about the health of the Canadian labour market and the path to a soft-landing scenario. Macklem noted that “we are more confident that inflation will continue to move closer to the target” without a large rise in the unemployment rate. Macklem added it was “reasonable” to expect further policy rate cuts. Interest rate futures imply 60% odds of a cut in July while a September rate cut is more than fully priced-in.

A soft Canada May CPI report today (1:30pm London) can reinforce the case for a July rate cut and curtail CAD strength. Headline inflation is expected to slow to more than a three-year low at 2.6% y/y from 2.7% in April. Core trim is projected to dip a tick to 2.8% y/y (lowest since June 2021) while core median is anticipated to remain unchanged at 2.6% y/y. The Bank of Canada (BOC) forecasts further easing in inflation given that three- and six-month measures of core inflation had been running lower than year-over-year rates. Additionally, the breadth of price increases above 3% has declined closer to its historical average.

AUD/USD is inching a little higher to the top-end of its multi-week 0.6575-0.6700 range on broad USD weakness. Australia’s Westpac Melbourne Institute Consumer Sentiment Index rose 1.7% to 83.6 in June, from 82.2 in May. Still, consumer sentiment remains deeply pessimistic with the index well below 100. Regardless, the RBA is in no rush to loosen policy as it expects it will be some time before inflation is sustainably in the 2-3% target range. Tomorrow’s May CPI indicator will offer greater near-term RBA policy guidance. The swaps market currently implies only a 24% probability of an RBA rate cut by December 2024 and 63% odds of a first cut in February 2025.

USD/JPY is holding near recent highs just under 160.00 with occasional kneejerk downside moves. So far, the moves look too shallow to imply the Bank of Japan (BOJ) stepped-in. When the BOJ intervened in 2022 and most recently on April 29 and May 1, 2024, the trading range was about 5 yen. There is no specific level for BOJ/MOF intervention. It’s the speed, rather than the level, of JPY depreciation that matters more for the ministry of finance. Vice Finance Minister Kanda previously specified he considers 10 yen moves against the dollar over the course of a month as rapid. USD/JPY is up a little over 5 yen since its June 4 lows at 154.55. This suggests the intervention zone is between 160.00-165.00.

Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction