Dollar Firm Ahead of FOMC Minutes

February 21, 2024
  • FOMC minutes will be the highlight; the market is finally listening to the Fed; Canada January CPI came in soft
  • U.K. government delivered the biggest budget surplus on record in January; U.K. CBI reported its industrial trends survey for February
  • Japan’s Cabinet Office downgraded its assessment of the economy for the first time since November; Japan reported January trade data; Australia reported Q4 wage price Index; New Zealand reported Q4 PPI; China introduced more measures to support local equity markets; Indonesia kept rates steady at 6.0%, as expected

The dollar is firm ahead of the FOMC minutes. DXY is trading modestly higher near 104.148 after a brief dip below 104. The euro is trading lower near $1.08, while sterling is trading lower near $1.26 despite favorable PSNB data (see below). USD/JPY is trading flat near 150 despite the government’s downgrade to the economic outlook (see below). When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon and the markets are finally coming around to our view (see below). The data continue to come in mostly firmer while Fed officials remain cautious about easing. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation.


FOMC minutes will be the highlight. Recall that the Fed delivered a hawkish hold at the January 30-31 meeting, which was partially necessitated by the outsized market reaction to its dovish hold at the December 12-13 meeting. Last month, Chair Powell emphasized that a March rate cut was not likely and added that “we are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.” Lastly, Powell underscored that the Fed was in no hurry to adjust the pace of QT, noting that discussions would begin in earnest at the March 19-20 meeting. While there are unlikely to be any surprises in the minutes, the risks are tilted towards a hawkish one. Bostic speaks today.

The market is finally listening to the Fed. Odds of a March cut have fallen to only 10% after starting the year off nearly priced in. Odds of a May cut have fallen to only 40% after starting the year off also priced in. With the data coming in strong, the market is now pricing in the first cut in June. While these expectations will ebb and flow with the data, we see the odds tilted towards a later start to the easing cycle rather than sooner.

Canada January CPI came in soft. Headline came in at 2.9% y/y vs. 3.3% expected and 3.4% in December. This was the first deceleration since October and moves inflation back within the 1-3% target range for the first time since June 2023. Core trim came in at 3.4% y/y vs. 3.6% expected and 3.7% in January, while core median came in at 3.3% y/y vs. 3.6% expected and a revised 3.5% (was 3.6%) in January. The data have moved the expected timing of the first BOC cut to June vs. July at the end of last week.


The U.K. government delivered the biggest budget surplus on record in January. Public sector net borrowing (ex-banking groups) came in at -GBP16.7 bln vs. -GBP18.4 bln expected and -GBP18.2 bln projected by the Office for Budget Responsibility. Still, the government will be in a position to deliver some tax cuts in the March 6 budget. If so, this could discourage the Bank of England from cutting rates as much as is currently implied by money markets (75 bp in 2024) and bodes well for GBP. Dhingra speaks today. Of note, Dhingra shifted to a 25 bp cut at the February 1 meeting from a hold previously.

U.K. CBI reported its industrial trends survey for February. Total orders improved to -20 vs. -27 expected and -30 in January, while selling prices rose to 17 vs. 11 expected and 9 in January. Improvement in this survey would seem to confirm the recent improvement in the U.K. manufacturing PMI, which will be reported tomorrow. It is expected at 47.5 vs. 47.0 in January. If so, it would be the highest since April 2023 but still below the 50 boom/bust line.


Japan’s Cabinet Office downgraded its assessment of the economy for the first time since November. In its monthly report for February, the government said that the economy is recovering at a moderate pace but noted that some areas are showing sluggishness. Indeed, the Cabinet Office lowered its assessment for production due to weakness in manufacturing as well as for private consumption due to weakness in household spending. This suggests weakness since in Q3 and Q4 may carry over into Q1 and comes at a tricky time for the Bank of Japan as it considers when to hike rates this year. The market consensus still sees June as likely for liftoff.

Japan reported January trade data. Exports came in at 11.9% y/y vs. 9.5% expected and 9.7% in December, while imports came in at -9.6% y/y vs. -8.7% expected and -6.9% in December. However, Japan unexpectedly recorded an adjusted trade surplus of JPY235.3 bln, the first surplus since May 2021. As a result, the current account surplus (3.5% of GDP in Q4 2023) can widen further and perhaps cushion the decline in JPY.

Australia reported Q4 wage price Index. It came in as expected at 0.9% q/q vs. 1.3% in Q3, but the y/y rate came in a tick higher than expected at 4.2% and picked up from a revised 4.1% (was 4.0%) in Q3. This was just shy of the 2008 high of 4.3%. The private sector was the main contributor at 0.9% q/q, while the public sector saw its highest quarterly rise since Q4 2008 at 1.3% q/q due to newly implemented enterprise agreements. Going forward, some indicators of wages growth (like the RBA’s liaison program) suggest wage pressures will cool towards 3.5-3.75% over 2024. Strong wage growth will validate the RBA’s decision not to rule out further rate hikes and should support AUD. That said, the market is not pricing in further tightening and continues to see the first cut in August.

New Zealand reported Q4 PPI. Input prices came in at 0.9% q/q vs. 1.2% in Q3 while output prices came in at 0.7% q/q vs. 0.8% in Q3. The y/y rate for input prices picked up to 1.9% vs. 1.5% in Q3 whilst slowing to 2.0% vs. 2.1% in Q3 for output prices. The market still sees slightly more than 50% odds of one more hike, but we disagree. Overall, recent data support the view that disinflation will continue and that there is no need to tighten further. Indeed, inflation is high but falling and 2-year ahead inflation expectations is 2.5%. Importantly, the policy rate is well above the RBNZ's estimate of the neutral rate (2.5%) suggesting monetary policy is tight enough to rein back inflation to target.

China introduced more measures to support local equity markets. The Shanghai and Shenzen stock exchanges imposed a trading ban on a major quant fund and pledged to increase monitoring of quant trading overall. The China Securities Regulatory Commission also banned institutoinal investors from reducing equity holdings at the open and close of each trading day, and has created a task force to monitor short-selling. When all is said and done, policymakers continue to focus on the symptoms of China’s malaise rather than the illness itself. While the various support measures have led to periodic short-term bounces, a sustainable rally in China’s equity markets seems far and away right now.

Bank Indonesia kept rates steady at 6.0%, as expected. Governor Warjiyo said rates would be kept steady for “a while” and noted that the bank will likely assess in H2 if there any room for a rate cut. Warjiyo added that with the Fed unlikely to cut rates until H2, rising UST yields are putting pressure on EM currencies, implying limited room right now for BI to cut rates. Bloomberg consensus sees steady rates through H1 followed by 50 bp of easing in Q3 followed by another 25 bp in Q4. Rates are seen bottoming at 4.75% in 2025.

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