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.

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