• The dollar is finally getting some traction; Fed tightening expectations have picked up bit; regional Fed business surveys for April will start rolling out
  
• Some ECB hawks are softening their tone; reports suggest the BOE is considering an overhaul of its deposit guarantees as a result of the recent banking sector turmoil; Bank of Israel releases its minutes
  
• There has been increasing chatter about possible early elections in Japan; any potential for early elections would likely keep the BOJ on hold; PBOC kept its key 1-year MLF rate steady at 2.75%, as expected

The dollar is firm as the new week begins. DXY is up for the second straight day and trading near 101.714. A break above 102.036 Is needed to set up a test of the April 10 high near 102.807. The euro is trading just below $1.10 while sterling traded as low as $1.2375 earlier before rebounding to trade near $1.24 currently. USD/JPY is trading at the highest in over a month just above 134 and is on track to test the March 15 high near 135.10. Recent data have been dollar-supportive and we are finally seeing a reaction in U.S. yields. Until rate cuts this year are finally priced out, the dollar is likely to remain vulnerable. However, it seems that the process is under way (see below).

AMERICAS

The dollar is finally getting some traction. Relentless dollar selling over much of this past month was interrupted by a strong rebound Friday after the retail sales data and hawkish Fed comments. Sterling may be the canary in a coalmine as it recorded an outside down day that points to further losses this week. A test of the April 10 low near $1.2345 is likely and a break below would set up a test of the April low near $1.2275. In turn, this may drag the other foreign currencies along for the ride. Part of the story is higher U.S. yields. However, it remains to be seen how much ground can be clawed back after yields fell sharply during the banking sector turmoil.

Fed tightening expectations have picked up bit. WIRP suggests nearly 90% odds of 25 bp hike at the May 2-3 meeting, up from 70% at the start of last week and 50% at the start of the week before that. Small odds of another 25 bp hike in June has crept back into the market. After that, only one cut is priced in by year-end vs. two at the start of last week. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year. If a second hike gets more priced in while a rate cut gets more priced out, this should help the dollar get more traction.

Regional Fed business surveys for April will start rolling out. Empire manufacturing survey kicks things off today and is expected at -18.0 vs. -24.6 in March. New York Fed services index will be reported tomorrow. Philly Fed reports Thursday and is expected at -19.7 vs. -23.2 in March. April NAHB housing market index and February TIC data will also be reported today. Of note, the Atlanta Fed’s GDPNow model is currently tracking Q1 growth at 2.5% SAAR, up from 2.2% previously. Next model update will come tomorrow.

EUROPE/MIDDLE EAST/AFRICA

Some ECB hawks are softening their tone. Nagel said “Core inflation sadly has accelerated in recent months. But I’m also counting on a retreat before the summer break. Still, inflation is too high and we have to do more on interest rates.” Elsewhere, Kazaks said “At some point, it’s only natural that the step size is reduced. For example, the increase could be not 50 bp but 25 bp. Should we move to a lower step already at the ECB Council meeting in May? I think there is every possibility for that, but a 50 bp increase is not an option that can be ignored.” Lagarde speaks later today. ECB tightening expectations have picked up a bit. The next policy meeting is May 4 and WIRP suggests a 25 bp hike is fully priced in with nearly 25% odds of a 50 bp hike. After that, another 25 bp hike is priced in for June followed by another one in September or October. There are only 15% odds of one last 25 bp hike in Q4 and so the peak policy rate is now seen near 3.75%, up from3.50% at the start of last week and 3.25% during the height of the banking panic.

Reports suggest the BOE is considering an overhaul of its deposit guarantees as a result of the recent banking sector turmoil. The FT is reporting that possible changes include raising the amount covered for businesses from the current GBP85k limit, as well as making banks pre-fund the guarantee system in order to speed up payouts. Bank of England Deputy Governor Cunliffe speaks later today. Of note, he is the Deputy in charge of financial stability and so could provide more insight into the bank’s views on the recent banking sector turmoil. Recently, Governor Bailey said “The idea behind deposit protection is to set a level below which the assurance of value holds, and above which it does not. Practice, I would suggest, points to the difficulty of this principle.” BOE tightening expectations have picked up modestly. The next policy meeting is May 11 and WIRP suggests around 80% odds of a 25 bp hike, with another 25 bp hike price in for September 21. As a result, the peak policy rate is seen near 4.75% vs. between 4.50-4.75% at the start of last week.

Bank of Israel releases its minutes. At the April 3 meeting, the bank hiked rates 25 bp to 4.5% and noted that inflation is broad and remains high. The research department saw the policy rate at 4.75% in Q1 2024 but the bank noted that the rate path will be determined by the data. Lastly, it weighed in on the social unrest and estimated that it could shave off 2.8% of GDP over three years. Next policy meeting is May 22 and much will depend on the data and the shekel, which is one of the worst performing currencies YTD due largely to heightened political tensions. The market sees the policy rate peaking near 4.75% over the next six months.

ASIA

There has been increasing chatter about possible early elections in Japan. Recent polls show support for Prime Minister Kishida and his cabinet rising, leading some to believe that he will take advantage of the positive momentum and call elections ahead of the LDP leadership contest scheduled for September 2024. However, the picture has been muddied by the weekend assassination attempt on Kishida. After former Prime Minister Abe was assassinated last year, the LDP’s popularity fell due to the party’s links to the controversial Unification Church. Five by-elections will be held April 23 and should provide insight into the LDP’s fortunes in the wake of the bombing.

Any potential for early elections would likely keep the BOJ on hold. WIRP suggests no odds of liftoff April 28 or June 16 before rising to nearly 30% for July 28. A hike isn’t priced in until 2024 as the odds stand near 80% for December 19. In addition, the subsequent tightening path is seen as very mild as the market is pricing in only 10 bp of tightening over the next 12 months followed by only 25 bp more over the subsequent 24 months. That is why we expect any knee-jerk drop in USD/JPY after liftoff to be fairly limited. We know we are in the minority here as most analysts look for a stronger yen in 2024. As it sis, the pair is trading at the highest level since March 15 and a break above 134.75 would set up a test of the March high near 138.

People’s Bank of China kept its key 1-year MLF rate steady at 2.75%, as expected. However, the net injection of CNY20 bln via the MLF was the smallest since November. China reports Q1 GDP and March IP and retail sales data tomorrow. Growth is expected at 2.0% q/q vs. 0.0% in Q4, while the y/y rate is expected at 4.0% vs. 2.9% in Q4. IP is expected at 4.4% y/y vs. 2.4% in January-February while sales are expected at 7.5% y/y vs. 3.5% in January-February. Commercial banks will set their 1- and 5-year Loan Prime Rates Thursday and are expected to be kept steady at 3.65% and 4.30%, respectively. With price pressures low and the recovery so far proving to be lackluster, further monetary easing is likely this year.