Dollar Firm as Key Data Week Begins

February 13, 2023

Win Thin

U.S. yields continue to edge higher ahead of key inflation data this week
The European Commission released updated macro forecasts; ECB doves are starting to push back; BOE MPC member Haskel added to the Brexit chorus
Falling JGB yields suggest expected BOJ liftoff is not imminent; RBA Governor Lowe is coming under fire for holding a closed door meeting with banks; Singapore Q4 GDP data were revised down

The dollar is getting more traction ahead of key U.S. data this week. DXY is up for the second straight day and trading near 103.70. Last week’s break above 103.793 sets up an eventual test of the January high near 105.631. The euro traded near $1.0655, the lowest since January 9. The break recent below $1.0695 sets up an eventual test of the January 6 low near $1.0485. Sterling is trading near $1.2050. It is likely to test last week’s new cycle low near $1.1960 and then the January 6 low near $1.1840. USD/JPY traded near 132.75 today, the highest since February 6 as BOJ tightening concerns ease (see below). We believe the pair remains on track to test the January 6 high near 134.75.

AMERICAS

U.S. yields continue to edge higher ahead of key inflation data this week. The 2-year yield is trading near 4.53%, the highest since November 30 and on track to test the November 4 cycle high near 4.80%. The 10-year yield is trading near 3.75%, the highest since January 6 and on track to test the December 30 high near 3.90%. The move higher coincides with renewed inflation concerns and a reprising of Fed tightening expectations. WIRP suggests 25 bp hikes March 22 and May 3 are nearly priced in, while the odds of a third hike in June or July top out near 45%. Strangely enough, an easing cycle is still expected to begin in Q4 but we believe that will be corrected in the next stage of Fed repricing, which may come after CPI and PPI data this week. Bowman speaks today.

EUROPE/MIDDLE EAST/AFRICA

The European Commission released updated macro forecasts. The latest forecasts for the eurozone show growth of 0.9% in 2023 and 1.5% in 2024, adding that it would narrowly avoid recession. The EC also cut its eurozone inflation forecasts to 5.6% in 2023 and 2.5% in 2024, and noted that the eurozone is in better shape mainly due to lower than expected energy prices and noted that "Continued diversification of supply sources and a sharp drop in consumption have left gas storage levels above the seasonal average of past years, and wholesale gas prices have fallen well below pre-war levels." Lastly, the EC said that "Confidence is improving and January surveys suggest that economic activity is also set to avoid a contraction in the first quarter of 2023" whilst warning that "As inflationary pressures persist, monetary tightening is set to continue, weighing on business activity and exerting a drag on investment." We continue to believe that optimism regarding the eurozone is overdone and has likely peaked.

ECB doves are starting to push back. Centeno said “For sure we’re much closer to that terminal rate than before. We are approaching it and I think March will be a great moment for us to be very clear about it.” He added that the policy outlook will become a lot more clear when new economic projections are revealed at the March 16 meeting. Elsewhere, Guindos said “What we did the other day was raise interest rates by 0.5 percentage point, announce our intention to raise them again by 0.5 and after that we will go depending on the data that is produced.” These comments are in stark contrast to the hawks, who are still saying full speed ahead with the tightening cycle. WIRP suggests a 50 bp hike March 16 is nearly priced in, while a 25 bp hike May 4 is priced in along with 20% odds of a larger 50 bp move. Another 25 bp hike June 15 is priced in, followed by around 35% odds of one last 25 bp hike in Q3. These expectations are likely to drift lower if continued disinflation gives the doves the upper hand. We have already seen the cracks reappear after the February 2 meeting.

BOE MPC member Haskel added to the Brexit chorus. He noted that U>K. productivity has suffered from Brexit and estimated the so-called “productivity penalty” is currently 1.3% of GDP, or about GBP29 bln total. Of note, the BOE’s most recent Monetary Policy Report warned that warned that business investment is “very subdued” and that the negative Brexit impact on trade had hit the U.K. even sooner than expected. Tightening expectations have steadied. WIRP suggests a 25 bp hike March 23 is nearly priced in. After that, a final 25 bp hike is nearly priced in for June 22, along with very low odds of another 25 bp hike in Q3 and so the expected terminal rate is now back to 4.5% after starting off last week near 4.25%. This is still well below the peak near 6.25% right after the disastrous mini-budget back in September.

ASIA

Falling JGB yields suggest expected BOJ liftoff is not imminent. The 2-year JGB yield is trading near -0.06%, the lowest since mid-November. It has been negative since the end of January after spending most of last month in positive territory. The 10-year yield is trading right at the 0.50% YCC ceiling, while the 30-year yield is trading near 1.49%. Next BOJ policy meeting March 9-10 will be the last one under Governor Kuroda and while no change is expected, we cannot rule out one last surprise. WIRP suggests nearly 50% odds of liftoff April 28, rising to just above 70% June 16 and fully priced in for July 28. The expected tightening path is very mild, with the market pricing in 22 bp of tightening over the next 12 months followed by another 35 bp more over the subsequent 24 months. That is why we expect the drop in USD/JPY after liftoff to be fairly limited.

RBA Governor Lowe is coming under fire for holding a closed door meeting with banks. An off the record briefing was held February 9, just two days after the RBA hiked rates. Due to the revelations, Deputy Governor Ellis has canceled a similar private briefing that had been scheduled for this Wednesday. The government ordered a review of the RBA when it came into office last year and these sorts of revelations are a bad look. Treasurer Chalmers noted that “This is one of the things that I’ve been discussing with the RBA review panel - how they communicate their decisions and the context behind their decisions is one of the key focuses of that.” Final recommendations will reportedly be made next month. Of note, Lowe’s 7-year term ends this September and his reappointment was not assured even before these latest revelations.

Singapore Q4 GDP data were revised down. Growth came in at 0.1% q/q vs. 0.3% expected and 0.2% preliminary, while the y/y rate came in at 2.1% vs. 2.3% expected and 2.2% preliminary. What this means is that the economy had even less momentum than we thought as last year ended. This is the slowest y/y rate since Q4 2020. For 2022 as a whole, growth came in at 3.6%. Other indicators suggest growth will slow further in Q1 and the IMF forecasts 2023 growth to slow to 2.3%. With inflation finally coming, we expect the MAS to keep policy on hold at its next meeting in April.

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