Dollar Flat in a Quiet Start to the Week

April 22, 2024

Win Thin

U.S. yields continue to rise ahead of heavy supply; the Fed media blackout went into effect at midnight Friday; Chicago Fed reports its March NAI; growth remains robust
We doubt ECB President Lagarde will offer new policy guidance today; the U.K. housing market continues to improve
Taiwan reported March export orders

The dollar is trading flat in a quiet start to the week. DXY is trading flat for the second straight day near 106.165 but remains on track to test the November 1 high near 107.113. The euro is trading lower near $1.0650 and the clean break below $1.0755 sets up a test of the November 1 low near $1.0515. Elsewhere, sterling is trading lower near $1.2340 while USD/JPY is trading higher near 154.75. The dollar rally should continue as data confirm persistent inflation and robust growth in the U.S. In turn, Chair Powell and other Fed officials have taken a much more hawkish turn ahead of the current quiet period (see below). This backdrop along with upcoming heavy UST supply should keep upward pressure on U.S. yields. We believe that while market easing expectations have adjusted violently this month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

U.S. yields continue to rise ahead of heavy supply. The 2-year yield is trading at 5.01% and on track to test the October high near 5.26%, while the 10-year yield is trading near 4.65% and on track to test the October high near 5.02%. Heavy supply could help push yields even higher. Treasury auctions a total of $183 bln in 2-, 5-, and 7-year notes this week. Data this week should show continued strength in the U.S. economy, which in turn should lead to higher yields and further dollar gains.

The Fed media blackout went into effect at midnight Friday. The market often softens its Fed expectations during this quiet period. However, the Fed has been sending a consistently hawkish message in recent weeks and markets would do well not to forget that. Odds of a June cut have fallen to 15%, while odds of a July cut have fallen to 45%. Even a September cut is not fully priced in, with odds falling to 85%.

Chicago Fed reports its March National Activity Index. Headline is expected at 0.09 vs. 0.05 in January. If so, the 3-month moving average would rise to -0.13 vs. -0.18 in January and move further from the -0.7 threshold that signals recession.

Growth remains robust. The Atlanta Fed GDPNow model is tracking Q1 growth at 2.9% SAAR and its final read will be released Wednesday, followed by its initial Q2 estimate Friday. The New York Fed GDP nowcast model’s final estimate for Q1 growth was 2.2% SAAR. This model sees Q2 growth at 2.8% SAAR and will be updated Friday. Its initial estimate for Q3 will come in early June.

EUROPE/MIDDLE EAST/AFRICA

We doubt ECB President Lagarde will offer new policy guidance today. She has signaled that the first cut will come in June, with virtually every ECB official backing this timeline. After that, however, there isn’t much agreement as the split between the hawks and doves remains in place. That said, it’s really a question of whether the ECB cuts three times this year or four, though we favor the latter. Villeroy also speaks today.

The U.K. housing market continues to improve. The U.K. Rightmove national asking price rose 1.1% m/m and 1.7% y/y in April, a twelve-month high. The outlook for this sector should improve, as the market is still pricing in over 90% odds of an August rate cut.

ASIA

Taiwan reported March export orders. Orders are expected at 4.2% y/y vs. -10.4% in February. If so, this would be the strongest reading since June 2022 and would argue for further strength in exports. Strength in orders was driven by Hong Kong and China. Elsewhere, Korea reported trade data for the first twenty of April. Exports rose 11.1% y/y and imports rose 6.1% y/y. Of note, exports to China rose 9.0% y/y while exports to the U.S. rose 22.8% y/y.

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