Dollar Flat in Listless Holiday Trading

April 10, 2023
  • Last Friday’s jobs data supports our view that while the U.S. economy is slowing, it remains pretty, pretty, pretty good; this week brings CPI Wednesday, PPI Thursday, and retail sales Friday Fed tightening expectations remain depressed
  • Turkey reported February current account data
  • BOJ Governor Ueda will give his first press conference shortly after taking up his post over the weekend; February current account data are worth discussing; China held several military drills around Taiwan over the weekend

The dollar is flat in quiet trading as most European markets remain closed for Easter Monday. DXY is trading flat near 102 now but the clean break below 102 last week sets up a test of the February low near 100.82. The euro is trading flat near $1.09 after being unable to break above $1.0975 last week but remains on track to test the February high near $1.1035. Sterling is trading flat near $1.2435 after being unable to build on its gains after trading last week at the highest level since last June near $1.2525. USD/JPY is trading flat near 132.20 ahead of Governor Ueda’s first press conference after he took up his post over the weekend (see below). Bottom line: the dollar may see some safe haven bid from time to time but until U.S. yields recover, the dollar is likely to remain under pressure near-term. While last week’s jobs data was dollar-supportive, this week’s inflation and retail sale data will also be key in setting the dollar’s near-term direction.

AMERICAS

Last Friday’s jobs data supports our view that while the U.S. economy is slowing, it remains pretty, pretty, pretty good. The labor market is softening a bit but recall that pre-pandemic, a 236k reading would be considered excellent. Once again, ADP undershot NFP. The drop in the unemployment rate to 3.5% was due to a 577k gain in the household survey, which has been outperforming the establishment survey in recent months. Average hourly earnings fell a bit to 4.2% y/y but overall, we think the Fed will still see the need for further cooling in the labor market. Indeed, its March forecast sees unemployment ending this year at 4.5%, a full percentage point higher than the actual March reading.

This week brings CPI Wednesday, PPI Thursday, and retail sales Friday. This will be the last batch of top tier economic data ahead of the next FOMC meeting May 2-3, as the April jobs report will come out May 5. March PCE data out April 28 will be last piece of the puzzle ahead of the Fed’s decision.

Fed tightening expectations remain depressed. WIRP suggests around 70% odds of 25 bp hike at the May 2-3 meeting, up from 50% at the start of last week. After that, it’s all about the cuts. Two cuts by year-end are fully priced in. In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year. This week’s CPI and PPI data are likely to underscore the fact that inflation remains stubbornly high and so we look for the hawkish tilt in Fed comments to continue this week. Williams speaks today. February wholesale trade sales and inventories will be the only data reported today.

EUROPE/MIDDLE EAST/AFRICA

Turkey reported February current account data. The deficit came in at -$8.78 bln vs. -$8.45 bln expected and -$9.85 bln in January. As a result, the 12-month total rose to -$55.4 bln, the highest since August 2012. The twin deficits will become harder and harder to finance until interest rates are allowed to rise. As it is, the next central bank policy meeting is April 27 and there are risks of another rate cut then to help boost the economy ahead of the May 14 elections. For now, policymakers are likely to continue using minor measures to help support the lira.

ASIA

BOJ Governor Ueda will give his first press conference shortly after taking up his post over the weekend. He inherits a mixed economic picture that will make any decision to remove accommodation very difficult. Inflation has been easing but due in large part to government energy subsidies, while the economy is showing signs of slowing. Given this backdrop, we do not believe Ueda will signal that he is in any hurry to tighten. WIRP suggests no odds of liftoff April 28, rising to around 5% June 16 and 35% for July 28. A hike isn’t priced in until September or October. 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 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.

February current account data are worth discussing. The adjusted surplus came in at JPY1.1 trln vs. JPY1.45 trln expected and JPY216 bln in January. However, the investment flows will be of most interest. February data showed that Japan investors remained net buyers of U.S. bonds (JPY4.5 trln) for the second straight month after being net sellers four straight months and for thirteen of the past fifteen. It was also the largest monthly net buying since March 2020. Japan investors remained net sellers (-JPY38 bln) of Australian bonds for the eighth straight month and remained net sellers of Canadian bonds (-JPY5 bln) for the second straight month and for twelve of the past thirteen months. Investors turned net sellers of Italian bonds (-JPY31 bln) again. Overall, Japan investors were total net buyers of foreign bonds (JPY4.3 trln) for the second straight months after four straight months of net selling.

China held several military drills around Taiwan over the weekend. The display coincided with Taiwan President Tsai’s return from a trip to the U.S. where he met with House Speaker McCarthy. Meanwhile, the U.S. Navy conducted a so-called freedom of navigation operation in the South China Sea near the Spratly Islands today. We are hopeful that tensions in the region die down soon. In related news, French President Macron urged European leaders to take an independent approach to U.S.-China tension and stressed that “Strategic autonomy must be the battle of Europe. We don’t want to depend on others for critical topics. If the tensions between the two superpowers heat up…we won’t have the time nor the resources to finance our strategic autonomy and we will become vassals.” Macron has just returned from a visit to Beijing.

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