Dollar Flat as Eventful Central Bank Week Begins

March 18, 2024

Win Thin

U.S. Treasury yields are trading near the February highs; given how much yields have recovered, the dollar really should be much higher; Q1 GDP forecasts are getting marked down; minor data will be reported today
Even the ECB doves are coalescing around a June cut; U.K. Rightmove house prices edged higher; Russian President Putin won another six-year term
The two-day BOJ meeting began today; New Zealand's services PMI came in strong; China reported mixed January-February data

The dollar is consolidating last week’s gains ahead of key central bank decisions this week. DXY is trading flat near 103.414. DXY has only retraced about a third of its February-March drop and so we see scope for some catch-up with higher UST yields. The 200-day moving average near 103.698 is a near-term target. The euro is trading higher near $1.09 while sterling is trading lower near $1.2730. USD/JPY traded at a cycle high near 149.35 today despite expectations of likely BOJ liftoff tomorrow (see below). We embrace this dollar recovery and believe further gains are likely. The U.S. data continue to come in mostly firmer and despite Powell’s recent dovish testimony before Congress, most Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should recover further. Last week’s inflation data sparked the start of this process and the FOMC decision Wednesday will be key for the continuation of this move.

AMERICAS

It's a jam-packed week of central bank meetings. We get policy rate announcements by the Fed, BOJ, RBA, BOE, Norges Bank, and SNB. Additionally, rate cuts are expected in Brazil, Colombia, Mexico, and Czech Republic. There are sure to be some surprises and so today’s calm is likely to give way to greater volatility ahead.

U.S. Treasury yields are trading near the February highs. The U.S. 10-year yield is on track to test the February 23 high near 4.35%, while the 2-year yield is on track to test that day's high near 4.74%. After that, we would target the highs from November. The solid gains were triggered by more signs that progress on taming U.S. inflation may be stalling, in turn suggesting the Fed will be patient before loosening policy. Indeed, Fed funds futures have trimmed the probability of a June rate cut to around 65%, with the first cut now fully priced in for the July meeting.

Given how much yields have recovered, the dollar really should be much higher. DXY has only retraced about a third of its February-March drop and so we see scope for some catch-up. Break of 103.976 is needed to set up a test of the February high near 105. The 200-day moving average near 103.698 is a near-term target. We see scope for market expectations on Fed policy to adjust further in favor of a firmer dollar, as underlying US price pressures are still high, and the economic growth outlook remains encouraging. This Wednesday’s FOMC decision will be key.

Q1 GDP forecasts are getting marked down. The New York Fed’s Nowcast model is now tracking Q1 growth at 1.8% SAAR, down from 2.1% previously. Looking ahead, it is now tracking Q2 growth at 2.1% SAAR, down from 2.5% previously. This model is updated every Friday. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.3% SAAR and will be updated tomorrow after the data.

Regional Fed surveys will continue to roll out. New York Fed services index will be reported today and stood at -7.3 in February. Last week, the Empire manufacturing survey came in at -20.9 vs. -7.0 expected and -2.4 in February.

Housing data will hold some interest. March NAHB housing market index will be reported today and is expected to remain steady at the six-month high of 48.

EUROPE/MIDDLE EAST/AFRICA

Even the ECB doves are coalescing around a June cut. Over the weekend, Governing Council member de Cos said in an interview that “The announcement last week that we have completed our goal of getting inflation to 2% is compatible with a cut in interest rates soon, and that could probably happen in June.” There will be lots of ECB speakers this week. Centeno speaks later today.

U.K. Rightmove house prices edged higher. The national asking price rose 1.5% m/m in March, the biggest monthly increase since May 2023. This pushed the y/y rate up to 0.8%, the highest since June 2023. Improving U.K. housing market activity supports a recovery in consumption spending and reduces the likelihood of an aggressive BOE easing cycle. The bank is widely expected to keep rates steady this Thursday, while the first cut is priced in for August 1.

To no one’s surprise, Russian President Putin won another six-year term in the weekend election. He won with 87.3% of the vote, up from 77% in the 2018 election. He becomes the longest serving leader of Russia since Josef Stalin. Putin struck a defiant tone, saying “No matter how much anybody wanted to suppress us, our will, our consciousness, nobody in history has ever succeeded, they have not succeeded now, and they will never succeed.” This tone suggests no significant policy changes will be seen.

ASIA

The two-day Bank of Japan meeting began today. Despite a flurry of reports last week that the bank may hike rates, our base case is for the bank to keep the policy rate at -0.10% and stick with its 10-year JGB yield target of “around” 0% with 1% as an upper bound reference. We also expect the BOJ to terminate its guideline to purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). This guideline has become redundant considering the BOJ has not bought ETF/J-REITs since October 2023 and Japan’s stock market rallied recently to a 34-year high. The monetary policy implications are minimal because ETFs and J-REITs account for only 5% of the BOJ’s balance sheet. Of note, the market is pricing in 50-50 odds of a hike this week.

The fact that USD/JPY continues to trade near the highs is noteworthy. The pair is undoubtedly vulnerable to a kneejerk drop if the BOJ delivers a rate hike. However, the USD/JPY uptrend will likely remain intact because Japan’s improving inflation backdrop and soft economic activity suggest the BOJ is unlikely to normalize the policy rate by more than is currently priced in over 2024. Updated macro forecasts won’t come until the April meeting.

New Zealand's services PMI remains firm. Headline rose to a 9-month high of 53 in February, suggesting the economy is on track to recover from last year’s sluggish growth. Of note, its manufacturing PMI jumped to 49.3 in February, the highest since February 2023. No wonder RBNZ easing expectations have been pushed out, with the first cut now priced in for October vs. August earlier this month. On Wednesday, New Zealand reports Q4 GDP and growth is expected at 0.1% q/q in Q4 2023 vs. -0.3% in Q3, while the RBNZ projects GDP to be flat.

China reported mixed January-February IP, retail sales, property investment, and fixed asset investment. IP came in at 7.0% vs. 5.2% expected and 6.8% in December, while sales came in at 5.5% y/y vs. 5.6% expected and 7.4% in December. Elsewhere, FAI came in at 4.2% YTD vs. 3.2% expected and property investment came in at -9.0% YTD vs. -8.0% expected. Commercial banks set their Loan Prime Rates Wednesday. The 1- and 5-year LPRs are expected to remain steady at 3.45% and 3.95%, respectively. Last week, the PBOC kept its key 1-year MLF at 2.5% but drained liquidity for the first time since November 2022. Monetary policy has pretty much reached the limits of what it can do in this deflationary environment and so any further easing is likely to be modest. Bottom line: the 5% growth target for this year will be very difficult to meet.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.