Dollar Edges Higher as Japan and U.K. Return From Holiday

May 07, 2024

Win Thin

Fed officials are echoing Powell’s tone; Fed easing expectations have fallen a bit after the initial post-FOMC spike; Fed released its Q1 SLOOS
ECB remains on track to cut rates in June; Germany reported soft March factory orders and firm trade data; eurozone reported firm March retail sales; U.K. BRC reported weak April sales
BOJ Governor Ueda spoke; RBA kept rates steady at 4.35%, as expected; Governor Bullock struck a balanced tone; Australia reported soft Q1 real retail sales

The dollar edges higher as both Japan and the U.K. return from holiday. DXY is trading higher near 105.245 after trading as low as 104.522 last week. It has retraced over a third of this month’s drop, with key retracement objectives ahead at 105.506 (50%) and 105.738 (62%). The euro is trading flat near $1.0765 while sterling is trading lower near $1.2540. USD/JPY is trading higher near 154.55 despite Ueda comments (see below) as the impact of last week’s intervention fades. AUD is the worst performing major after the RBA delivered a balanced hold, disappointing those looking for a more hawkish bias (see below). We believe the backdrop of persistent inflation and robust growth in the U.S. remains in place, but the next round of major data won’t come until next week. As a result, last week’s combination of softer data and a dovish Fed (see below) could continue to weigh on the dollar near-term.

AMERICAS

Fed officials are echoing Powell’s tone. Barkin said “I am optimistic that today’s restrictive level of rates can take the edge off demand in order to bring inflation back to our target. The full impact of higher rates is yet to come.” This is basically ruling out a rate cut. He also noted that “The risk is that as we get less help from the goods sector, continued shelter and services inflation will leave the overall index higher than our target. That’s what we’ve seen so far this year.” Kashkari speaks today and could offer a more hawkish tone.

Fed easing expectations have fallen a bit after the initial post-FOMC spike. Odds of a June cut remain steady at around 10%, but July odds have fallen to 35% and September odds have fallen to 85%. A November cut is still fully priced in.

Fed released its Senior Loan Officer Opinion Survey. Of note, SLOOS respondents compare lending standards vs. the previous quarter. The net share of banks reporting tighter credit standards for commercial and industrial loans to large and medium firms rose to 15.6% vs. 14.5% in Q4. Similarly, the net share for small firms rose to 19.7% vs. 18.6% in Q4, while those for credit cards fell to 21.2% vs. 22.9% in Q4. March consumer credit will be reported today and is expected at $15.0 bln vs. $14.125 bln in February.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank remains on track to cut rates in June. GC member De Cos said, “If these inflation prospects are maintained, from my point of view it would be advisable to begin reducing the current level of monetary restriction in June.” However, he added that “In any case, with the level of uncertainty that’s still very high, we’ll continue applying a data-dependent approach and decisions will be adopted meeting by meeting, without committing to a specific path for rates.” Nagel speaks twice today.

Germany reported soft March factory orders and firm trade data. Orders came in at -0.4% m/m vs. 0.4% expected and a revised -0.8% (was 0.2%) in February. Elsewhere, exports came in at 0.9% m/m vs. 0.3% expected and a revised -1.6% (was -2.0%) in February, while imports came in at 0.3% m/m vs. -1.0% expected and a revised 3.0% (was 3.2%) in February. March IP will be reported tomorrow and is expected at -0.7% m/m vs. 2.1% in February.

Eurozone reported firm March retail sales. Sales came in a tick higher than expected at 0.8% m/m vs. a revised -0.3% (was -0.5%) in February. As a result, the y/y improved to 0.7% vs. -0.2% expected and a revised -0.5% (was -0.7%) in February. Italy reports retail sales tomorrow and are expected at 0.1% m/m. The eurozone economy has recovered quickly from its downturn as real GDP grew 0.3% q/q over Q1.

U.K. BRC reported weak April sales. Sales came in at -4.4% y/y s. 2.0% expected and 3.2% in March. This was the first y/y contraction since June 2022 and the weakest since November 2019. The timing of Easter may have affected the data according to the BRC. Either way, this does not bode well for official retail sales data due out May 24. That said, a bigger driver of GBP will be Thursday’s Bank of England decision and Monetary Policy Report.

ASIA

Bank of Japan Governor Ueda spoke. Similar to other officials, he warned that excessive yen moves are undesirable. Ueda also noted that he’s closely monitoring how the weak yen will affect prices. This is different from the tone he took after the April 26 BOJ decision, when Ueda noted that the weak yen is not having a big impact on underlying prices yet. That seemed to invite further yen weakness and so Ueda seems to be doing some damage control. Of note, the decision to intervene may also have a political angle to it to appease certain business groups. The chairman of Japan’s Keidanren business lobby, Masakazu Tokura, said the yen is too weak beyond 150 to the dollar.

Reserve Bank of Australia kept rates steady at 4.35%, as expected. The bank stuck to its neutral policy guidance that “the Board is not ruling anything in or out.” Those looking for a tightening bias were left disappointed. Macro forecasts were updated and the RBA projects both headline and trimmed mean inflation to be higher through Q2 2025, largely because of sticky services price inflation. However, the bank still sees inflation returning to the 2-3% target range in H2 2025 and then to the midpoint in 2026.

Governor Michele Bullock struck a balanced tone during her press conference. With regards to rates, she emphasized that “we might have to raise, we might not” and added that the board discussed the option of raising rates at this meeting. In our view, the RBA’s next move is a cut and not a hike because household spending is sluggish. The swaps market has nearly priced out any odds of another hike over the six months, while a cut is priced in over the subsequent six months.

Australia reported soft Q1 real retail sales. Retail turnover came in a tick lower than expected at -0.4% in Q1 vs. a revised 0.4% (was 0.3%) in Q4. The Australian Bureau of Statistics points out that “the only rise in volumes over the past 18 months was the December quarter last year as extensive discounting from Black Friday sales boosted volumes.” Weak household spending activity should reinforce the case that the RBA move is a cut.

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