Dollar Drifts Lower as Markets Await Fresh Drivers

March 26, 2024

Win Thin

More Fed officials are revealing their Dots; March consumer confidence measures will be closely watched; Q1 growth remains solid; BOC Senior Deputy Governor Rogers speaks; Brazil central bank minutes will be released
BOE MPC member Mann warned that markets are still pricing too many cuts this year; Germany reported firmer April GfK consumer confidence; Hungary is expected to cut the base rate 75 bp to 8.25%; Nigeria is expected to hike rates 125 bp to 24.0%
Japanese officials continue to jawbone the yen; Australia Westpac Melbourne Institute consumer confidence softened; PBOC fixed the yuan higher for the second straight day

The dollar is drifting lower as markets await fresh drivers. DXY is trading lower for the second straight day near 104.065 after trading Friday at the highest since mid-February near 104.428. The euro is trading higher near $1.0865 while sterling is trading higher near $1.2670. USD/JPY is trading lower near 151.30 as official jawboning about the weak yen continues (see below). The dollar recovery should continue after this period of consolidation, not just on dovish developments from other central banks but also from Fed repricing. The U.S. data continue to come in mostly firmer and it’s clear from the Dot Plots (see below) that most Fed officials remain very cautious about easing too much or too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain even further.

AMERICAS

More Fed officials are revealing their Dots. Goolsbee said that three cuts in 2024 are in line with his thinking, while Bostic repeated his call for only one cut this year. We were pretty sure it was Goolsbee that was the lone official at four cuts this year but that is not the case. Recall that in the latest Dot Plots, 1 Fed official saw four cuts, 9 saw three cuts, 5 saw two cuts, 2 saw one cut, and 2 saw no cuts. As such, the unchanged 2024 median boiled down to just one dove that saw three cuts instead of two. Either way, it's interesting that Fed officials are now explicitly saying what their Dots are, something we've only really noticed since the December meeting. Cook did not reveal her 2024 Dot but stressed that the Fed must be careful and cautious in easing. There are no scheduled Fed speakers today, but we expect other FOMC members to reveal their Dots in the coming days.

March consumer confidence measures will be closely watched. Conference Board reports its consumer confidence measure, and the headline is expected at 107.0 vs. 106.7 in February. University of Michigan reports its final March reading Friday. Headline is expected to remain unchanged from the preliminary at 76.5. While both measures are down from their recent highs, we believe they remain high enough to support solid consumption as we move into Q2.

Regional Fed surveys for March will continue rolling out. Philly Fed non-manufacturing, Richmond Fed manufacturing (-5 expected) and services, and Dallas Fed services will all be reported today. Yesterday, Dallas Fed manufacturing came in at -14.4 vs. -10.0 expected and -11.3 in February. February durable goods order will also be reported today and expected at 1.0% m/m vs. -6.2% in January.

More housing data will be reported. January FHFA and S&P CoreLogic house price indices are expected to climb m/m by 0.3% and 0.2%, respectively. Yesterday, February new home sales came in at -0.3% m/m vs. 2.3% expected and a revised 1.7% (was 1.5%) in January. However, it's worth noting that the y/y rate improved to 5.9% and was the strongest since October. Last week, existing home sales, housing starts, and building permits all came in much stronger than expected as the housing sector continues to recover.

Q1 growth remains solid. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.1% SAAR and will be updated today after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 1.9% SAAR, up from 1.8% previously. Looking ahead, it is tracking Q2 growth at 2.2% SAAR, up from 2.1% previously. This model is updated every Friday.

February Chicago Fed National Activity Index is worth discussing. The headline came in at 0.05 vs. -0.34 expected and a revised -0.54 (was -0.30) in January. As a result, the 3-month average fell to -0.18. This is the lowest since October but still well above the -0.7 threshold that signals recession.

Bank of Canada Senior Deputy Governor Rogers speaks today. Recent softness in the data has led markets to move up the timing of the first rate cut. Markets see over 75% odds of a cut June 5, up from 50% in mid-March. While the odds of a cut April 10 are quite low at around 15%, the meeting will be important if the BOC wants to prepare markets for a move in June.

Brazil central bank minutes will be released. At last week’s meeting, the bank cut rates 50 bp to 10.75% but would only commit to another hike of the same magnitude at the next meeting May 8, implying a move to smaller cuts thereafter. Brazil also reports mid-March IPCA inflation. Headline is expected at 4.09% y/y vs. 4.49% in mid-February. If so, it would be the lowest since last July and would move further within the 1.5-4.5% target range. The swaps market is pricing in 100 of easing over the next six months that would see the policy rate bottom near 9.75%. The central bank releases its quarterly inflation report Thursday.

EUROPE/MIDDLE EAST/AFRICA

BOE MPC member Mann warned that markets are still pricing too many cuts this year. Specifically, she noted that “Wage dynamics in the UK are stronger and more persistent than the wage dynamics in either the United States or the euro area. Underlying services dynamics are also stickier more persistent than either the U.S. or the euro area. So on that basis, it’s hard to argue that the BOE would be ahead of the other two regions particularly the United States.” We agree. Mann justified switching her vote switch to a hold from a hike by highlighting that the U.K. labor market is softening and that employers are more reluctant to hire and added that discretionary services prices have softened. Of note, the market still sees three cuts this year, but the timing has been moved forward after the BOE decision. The market now sees 80% odds of a cut June 20, up from 50% at the start of last week.

Germany reported firmer April GfK consumer confidence. Headline came in at -27.4 vs. -28.0 expected and a revised -28.8 (was -29.0) in March. February retail sales will be reported Thursday and expected at 0.4% m/m vs. -0.4% in January. If sentiment indicators continue to edge higher, it would confirm that a modest recovery in the economy is under way. The ECB is still on track to cut rates in June. Muller said, “It can’t be ruled out that by June, when the ECB Governing Council again gathers to discuss monetary policy, that might be the moment where there might be enough confidence and it is possible to start reducing interest rates.” Subsequent cuts are largely priced in for September 12, October 17, and December 12.

National Bank of Hungary is expected to cut the base rate 75 bp to 8.25%. However, a handful of analysts look for smaller 25 or 50 bp cuts and a couple look for a larger 100 bp cut. We see risks that the bank slashes rates again by 100 bp following signs of a pause in the conflict between the government and the central bank. At the last meeting February 27, the bank cut rates 100 bp to 9.0% vs. 75 bp the previous several meetings and confirmed that it still sees the policy rate around 6-7% at mid-year. Deputy Governor Virag said the accelerated pace of easing was “temporary” and that later moves would remain “gradual.” However, stagnant economic activity and strong disinflationary pressure leaves plenty of room for the central bank to continue easing aggressively.

Nigeria central bank is expected to hike rates 125 bp to 24.0%. However, the market is all over the place. Of the 14 analysts polled by Blomberg, 4 see no change, 2 see 100 bp hike, 2 see 125 bp, 4 see 200 bp, and 2 see 400 bp. At the last meeting February 27, the bank delivered a hawkish surprise and hiked rates 400 bp to 22.75% vs. 250 bp expected. Since then, February inflation came in higher than expected at 31.7% y/y and so more tightening is clearly needed. This spike was due in large part to the devaluation in late January. Since then, the currency has gained and so inflation could start to ease.

ASIA

Japanese officials continue to jawbone the yen. Finance Minister Suzuki today warned that the government is watching FX moves with a high sense of urgency and will not rule out any options against excessive FX moves. Suzuki’s comments echoed those of his colleague and top currency official Kanda yesterday. We believe intervention risks rise significantly if USD/JPY moves above the 2022 high near 152. That said, the BOJ presented very dovish forward guidance and so monetary policy divergences remain quite wide and will keep upward pressure on USD/JPY.

Australia Westpac Melbourne Institute consumer confidence softened. Headline fell 1.8% to 84.4 in March, suggesting consumers are getting more concerned about the near-term economic outlook. It also validates the RBA’s concern about weak household consumption growth and would seem to support market pricing for 50 bp of easing this year starting in August. AUD/USD remains directionless just below its 200-day moving average near 0.6550 today but is likely to remain heavy as iron ore prices are coming under renewed downside pressure.

The PBOC fixed the yuan higher for the second straight day. This is clearly a demonstration of support after the weaker fix Friday spooked markets. While the bank may inject some short-term stability in the exchange rate, widening monetary policy divergences suggest that the yuan should continue to weaken.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term 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. 2022. All rights reserved.