Dollar Firm as New Week Begins

October 21, 2024
  • Fed easing expectations continue to adjust; U.S. growth remains robust
  • ECB doves control the narrative; France reported weak September retail sales
  • Deputy Governor Hauser tried to manage RBA easing expectations; China commercial banks cut their LPRs; regional trade data continue to soften

The dollar remains firm as the new week begins. DXY is trading higher near 103.681 and has nearly recouped Friday’s losses. It is on track to test the July 30 high near 104.799 and the only thing standing in the way is the 200-day moving average that comes in near 103.802 today. That level nearly coincides with the key 62% retracement objective for the June-September drop near 103.848 and a break above sets up a test of the June 26 high near 106.130. The euro is trading lower near $1.0850 as markets ramp up ECB easing expectations after last week’s cut. Clean break below $1.0875 sets up a test of the June 26 low near $1.0665. Sterling is trading lower near $1.3020 and USD/JPY is trading higher near 150 level. We believe that recent U.S. data and Fed comments continue to support a very gradual easing cycle. Market easing expectations for the Fed have adjusted after the recent spate of strong U.S. data but are still too dovish. As the Fed repricing continues, the dollar should see another leg higher. In the meantime, soft data and dovish central banks in the rest of the world highlight the ongoing divergences that favor the greenback.

AMERICAS

Fed easing expectations continue to adjust. 25 bp cuts in November and December are no longer fully priced in. Looking ahead, 125 bp of total easing is priced in over the next 12 months, which is well below the 150-175 bp that’s priced in from the ECB over the same time frame. As we have stressed time and time again, ongoing U.S. economic outperformance feeds into the divergence story that favors the dollar, and the markets are finally coming around to our view. There are plenty of Fed speakers this week and the recent string of firm U.S. data should keep officials cautious about easing too quickly. Logan, Kashkari, Schmid, and Daly speak today.

Indeed, U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.4% SAAR and will be updated Friday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 3.0% SAAR and Q4 growth at 2.6% SAAR and will also be updated Friday. Official Q3 GDP data will be reported October 30 and consensus sees growth at 3.0% SAAR, same as Q2. Momentum in the economy remains strong as we move into 2025. September leading index is the only data release today.

EUROPE/MIDDLE EAST/AFRICA

European Central Bank doves control the narrative. Governing Council member Simkus said “The direction is clear - less restrictive monetary policy. I can’t yet tell what will the decision be in December. But the direction is clear - down.” ECB easing expectations have picked up after last week’s 25 bp cut. The swaps market is pricing in a 25 bp cut in December, with nearly 30% odds of a larger 50 bp move. Looking ahead, the market is pricing in 150-175 bp of tightening over the next 12 months that would see the policy rate bottom between 1.5-1.75% vs. 2.0% at the start of last week.

France reported weak September retail sales. Sales came in at -0.5% y/y vs. a revised 0.1% (was 0.2%) in August. France is the first to report September sales and sets a weak tone. Indeed, even though Germany is the weak link in the eurozone, France is not far behind.

ASIA

Deputy Governor Hauser tried to manage RBA easing expectations. Hauser warned that rates won’t fall as much or as early as those of other central banks in part because inflation in Australia is still “too high.” Hauser added that most RBA models show a neutral rate between 3-4%, suggesting the current policy rate of 4.35% is not significantly restrictive. We expect the RBA to join the global easing cycle later this year as underlying economic activity is weak and points to lower inflation pressures. Australia’s Q3 CPI report October 30 will either support our view or ensure the RBA continues to lag its international peer.

China commercial banks cut their Loan Prime Rates. The 1- and 5-year LPRs were both cut 25 bp to 3.10% and 3.05%, respectively, vs. 20 bp expected. Still, the cut was in line with last month’s guidance from Governor Pan that the LPRs would go down by 20-25 bp. The PBOC will also set its 1-year MLF rate this week and is expected to keep it steady at 2.0%. We remain skeptical that the stimulus measures announced so far will have much lasting impact on the economy. More importantly, Chinese policymakers need to deliver a meaningful fiscal stimulus program to shore-up economic activity. Details of China’s recent fiscal stimulus pledge are likely to be unveiled by the end of this month.

Regional trade data continue to soften. Korea reported weak trade data for the first twenty days of October. Exports fell -2.9% y/y while imports fell -10.1% y/y. Adjusted for working days, exports rose 1% y/y vs. 7.5% in September. Elsewhere, Taiwan reported soft September export orders. Headline came in at 4.6% y/y vs. 5.2% expected and 9.1% in August and was very disappointing given the low base effects from last year. Of note, U.S. orders remained firm while Europe and Hong Kong/China weakened.

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