• U.S. yields are edging higher as risk-off impulses ease; DXY traded today at a new cycle high near 102.777; Fed tightening expectations remain robust; President Biden’s Fed nominations are falling into place; there are some minor U.S. data out today; Brazil reports mid-April IPCA inflation
  
• Russia announced it would halt natural gas flows to Poland and Bulgaria; eurozone consumer confidence measures continue to crumble; ECB tightening expectations have eased a bit; U.K. CBI reported weak April distributive trade survey; BOE tightening expectations have eased a bit; Sweden reported a slew of data ahead of the Riksbank tomorrow; a hawkish hold is expected
  
• This week's JPY price action is a good reminder that FX doesn't always move in a straight line; two-day BOJ meeting began today and ends with a decision tomorrow; Australia reported higher than expected Q1 CPI data; RBA tightening expectations have intensified; China President Xi pledged to boost infrastructure spending in an effort to boost growth
  

The dollar is firm as U.S. yields edge higher. DXY is up for the fifth straight day and traded at a new cycle high today near 102.777. The March 2020 high near 103 is getting close (see below). After Russia threatened to cut off gas supplies to Poland and Bulgaria, the euro traded at a new cycle low today just below $1.06. We look for a test of the February 2017 low near $1.05 and then the January 2017 low near $1.0340. After a period of consolidation, USD/JPY has resumed its march higher and traded back above 128. With the BOJ expected to maintain its ultra-dovish stance tomorrow, we continue to look for an eventual test of the 2002 high near 135.15. Sterling continues to underperform and traded at a new cycle low today near $1.2535. Once the $1.25 level goes, we target the June 2020 low near $1.2250. Between lingering risk-off impulses and an eventual recovery in U.S. yields, we believe the dollar uptrend remains intact.

AMERICAS

U.S. yields are edging higher as risk-off impulses ease. The U.S. 10-year yield traded as low as 2.71% earlier today but has since risen to 2.77% currently. Similarly, the 2-year traded as low as 2.47% yesterday but has since risen to 2.56% currently. Asian equity markets were mixed, but European equity markets are mostly higher and U.S. futures are pointing to a higher U.S. open. The dollar continues to firm along with the higher yields, which can be chalked up to the dollar smile theory that suggests the dollar will gain during periods of strong U.S. data and rising U.S. rates as well as bouts of risk-off sentiment.

DXY traded today at a new cycle high near 102.777. We continue to target the March 2020 high near 103 but have gotten here much sooner than we expected. As such, we have to start looking ahead as we think the strong dollar trend will remain in play through Q2 and into Q3. After 103, there's the December 2016 high near 103.65 but that's really not that far off either. After that, there really aren't any significant chart points until we get to the September 2002 high near 109.24. This seems to be a bridge too far. Yes, we are dollar bulls but we don't think it can rally another 6-7% from current levels. Perhaps we can get up to 105 before topping out but that's really just a guess at this point, pure and simple.

Fed tightening expectations remain robust. WIRP suggests 50 bp hikes at the May 3-4 and June 14-15 meetings are fully priced in, with nearly 25% odds of a possible 75 bp move in June. Looking ahead, swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%. While this almost meets our own call for a 3.5% terminal rate, we continue to see risks that the expected terminal rate moves even higher if inflation proves to be even more stubborn than expected. The media blackout ahead of the FOMC meeting is in effect and so there will be no Fed speakers until Chair Powell’s post-decision press conference the afternoon of May 4.

President Biden’s Fed nominations are falling into place. Brainard was confirmed as Fed Vice Chair yesterday by a 52-43 vote in the full Senate. Chair Powell will pass easily and a vote could be held this week. Nominee for Governor Jefferson is also likely to pass easily, but nominee for Governor Cook will be tougher as Republicans oppose her. Two Democrats were absent yesterday due to testing positive for COVID and so her vote will likely be delayed until they are back and able to vote. Barr still needs to have a hearing with the Senate Banking Committee before a full Senate vote can be held on his nomination as Vice Chair for supervision.

There are some minor U.S. data out today. March advance goods trade (-$105.0 bln expected), wholesale (1.5% m/m expected) and retail (1.6% m/m expected) inventories, and pending home sales (-1.0% m/m expected) will be reported. These readings will provide the final clues for the final GDPNow update today from the Atlanta Fed, which is currently tracking 0.4% SAAR vs. 1.3% previously. From the Atlanta Fed’s website: “After yesterday’s annual revision to retail sales by the US Census Bureau, the nowcast for first-quarter real personal consumption expenditures growth declined from 3.8 percent to 2.4 percent.” Advance Q1 GDP will be reported tomorrow and Bloomberg consensus is currently at 1.1% SAAR.

Brazil reports mid-April IPCA inflation. Inflation is expected at 12.15% y/y vs. 10.79% in mid-March. If so, it would be the highest since October 2003 and further above the 2-5% target range. Next COPOM meeting is May 4 and a 100 bp hike to 12.75% is expected. While the bank had signaled that would likely be the final hike in the cycle, higher than expected inflation should force another hike at the Jun 16 meeting. The swaps market sees 150 bp of tightening over the next 3 months that would see the base rate peak near 13.25%.

EUROPE/MIDDLE EAST/AFRICA

Russia announced it would halt natural gas flows to Poland and Bulgaria. This had long been expected after Russia gave the West an ultimatum last month to either pay for its energy shipments in rubles or face cutoff. Those payments are falling due in late April and early May but the EU has so far refused to pay in rubles, saying it would violate international sanctions already in place. Poland’s main gas supplier PGNiG said it had been informed that all flows will stop as of today. Poland is the largest economy in Eastern Europe and is nearly as large as Czech Republic, Romania, and Hungary combined. However, Poland is about a third the size of Italy and a sixth the size of Germany, two of the biggest importers of Russian gas. Clearly, by cutting off Poland and Bulgaria, Russia is daring the larger countries to refuse payments in rubles. Either way, this is very negative for the euro and the zloty (see below).

Poland said it’s fully prepared for a cutoff of all Russian energy supplies. Poland’s long-term gas contract with Russia expires at the end of this year and the government had repeatedly said it didn’t plan to extend it. It has reportedly already lined up LNG supplies and also plans to start a gas pipeline from Norway in October. Lastly, the Polish government said yesterday that it has enough fuel in storage and that customers won’t be affected. The government said it plans to keep filling its storage up to 90%. Elsewhere, Bulgaria has also taken steps to reduce its dependence on Russia but remains heavily reliant.

Eurozone consumer confidence measures continue to crumble. May German GfK consumer confidence came in at -26.5 vs. -16.0 expected and a revised -15.7 (was -15.5) in April. Elsewhere, France April consumer confidence came in at 88 vs. 92 expected and a revised 90 (was 91) in March. Tomorrow, Italy reports April economic sentiment and the eurozone reports April confidence measures.

ECB tightening expectations have eased a bit. WIRP suggests odds of liftoff June 9 are now less than 10% vs. 40% at the start of this week, while liftoff July 21 remains fully priced in. The swaps market is now pricing in 125 bp of tightening over the next 12 months vs. 150 bp at the start of this week, with another 75 bp of tightening priced in over the following 12 months that would see the deposit rate peak near 1.5%. Even with the downward adjustments, this still seems way too aggressive to us. Lagarde speaks today. The euro remains heavy and traded at a new low for this move today as it broke below $1.06 briefly. Further losses are likely and we look for a test of the February 2017 low near $1.05 and then the January 2017 low near $1.0340.

U.K. CBI reported its April distributive trade survey. Total reported sales came in at 3 vs. 11 expected and 20 in March, while retailing reported sales plunged to -35 vs. -5 expected and 9 in March. This follows a weak CBI industrial trends survey that was reported Monday, with total orders coming in at 14 vs. 22 expected and 26 in March, selling prices coming in at 71 vs. 80 expected and in March, and business optimism plunging to -34 vs. -15 expected and -9 in March. It’s clear that the various headwinds are taking a toll on the U.K. economy.

Bank of England tightening expectations have eased a bit. WIRP suggests another 25 bp hike to 1.0% is fully priced in for the next meeting May 5, while swaps market is pricing in 175 bp of tightening over the next 12 months vs. 200 bp at the start of this week that would see the policy rate peak near 2.5%. There are no BOE speakers scheduled for this week. Sterling continues to sink and traded today at the lowest level since July 2020 near $1.2535. Further losses are likely and we target the July 2020 low near $1.2480 and then the June 2020 low near $1.2250.

Sweden reported a slew of data ahead of the Riksbank tomorrow. March PPI, trade, and unemployment data were reported. PPI jumped 24.5% y/y vs.19.3% in February, suggesting upside risks to CPI in the coming months. However, the unemployment rate rose to a seasonally adjusted 7.6% vs. 7.4% expected and a revised 7.4% (was 7.3%) in February. Q1 GDP and March retail sales data will be reported tomorrow. The y/y growth rate is expected at 3.8% vs. 6.2% in Q4, while the q/q rate is expected at -0.6% vs. 1.4% in Q4. With the economic recovery continuing and price pressures still rising, Riksbank tightening expectations have picked up significantly.

The Riksbank is expected to deliver a hawkish hold. However, there is a split between the analysts and the swaps market as WIRP suggests odds of liftoff tomorrow are nearly 85%. The bank pivoted to a hawkish stance in mid-March, when Governor Ingves surprised markets by saying the bank is likely to hike rates before its forward guidance for H2 24 liftoff that came with the last meeting February 10. When asked about possible 2022 liftoff, he said “we cannot rule anything out.” We side with analysts and look for no change in rates tomorrow, but markets should be prepared for a hawkish shift in the bank’s expected rate path that sets up potential liftoff at the June 30 meeting. Looking ahead, the swaps market is pricing in 175 bp of tightening over the next 12 months followed by another 75 bp over the subsequent 12 months that would see the policy rate peak near 2.5%, which strikes us as much too aggressive.

ASIA

This week's JPY price action is a good reminder that FX doesn't always move in a straight line. We believe the recent risk-off impulses gave long-standing yen shorts an excuse to take profits, with the more recent shorts likely getting stopped out as a result. With the BOJ widely expected to deliver a dovish hold tomorrow, we continue to believe that the upward trajectory for USD/JPY remains intact after this current period of consolidation. Longer-term, we still target the 2002 high near 135.

Two-day Bank of Japan meeting began today and ends with a decision tomorrow. Another dovish hold is expected after the bank defended its Yield Curve Control again last week. Reports suggest the Bank of Japan will probably raise its FY22 projection for core inflation to 1.5-1.9% vs. 1.1% in January. However, officials stressed that there is no need to tighten policy as the inflationary impact from high oil prices is seen as temporary. This supports our view that Governor Kuroda is likely to maintain current policy through the end of his term in 2023, leaving it to his successor to tighten if conditions warrant.

Australia reported higher than expected Q1 CPI data. Headline inflation came in at 5.1% y/y vs. 4.6% expected and 3.5% in Q4, while trimmed mean inflation came in at 3.7% y/y vs. 3.4% expected and 2.6% in Q4. Headline is the highest since Q2 2001 and further above the 2-3% target range. Q1 PPI and March private sector credit data will be reported Friday, and the recent acceleration in PPI suggests upside risks to CPI in the coming quarters.

RBA tightening expectations have intensified. Odds of liftoff at the next meeting May 3 are now over 70% vs. less than 20% at the start of last week. A 50 hike at the June 7 meeting is fully priced in, with around 33% odds of a 75 bp move. Looking ahead, swaps market is pricing in 300 bp of tightening over the next 12 months vs. 250 bp at the start of last week, followed by another 75 bp over the subsequent 12 months that would see the policy rate peak near 3.75%. This more hawkish RBA outlook has lent AUD some support just above the late February low near .7095 but the recent break below the mid-March low near .7165 points to an eventual test of the January low near .6970.

China President Xi pledged to boost infrastructure spending in an effort to boost growth. Xi said “all-out efforts” must be made at a meeting of the Central Committee for Financial and Economic Affairs. Xi noted that infrastructure has always been a pillar of China’s economic and social development. The Committee later agreed that boosting infrastructure spending was important for ensuring national security and increasing domestic demand. This is the first truly bold effort to get ahead of the economic slowdown that’s been building for weeks, if not months. So far, monetary stimulus measures have been timid but it would appear that policymakers are looking more to fiscal stimulus, which would deliver a much quicker boost to the economy.