Dollar Flexing Its Muscles
- The Eurozone April CPI and Q1 GDP are today’s main event.
- The US April Conference Board consumer confidence index is the domestic highlight.
- China’s April PMIs were mixed. Australian consumer spending is weak. New Zealand business confidence plunges.
USD is firmer across the board and 2-year Treasury yields are holding just under recent highs around 5% supported by expectations the Fed will keep the funds rate high for longer. The US April Conference Board consumer confidence index is today’s highlight (3:00pm London). Headline is expected at 104.0 vs. 104.7 in March. Focus will be on the expectations index which slipped in March to the lowest level since October 2023. A further decline can trigger an intra-day USD pullback.
EUR/USD is heavy near 1.0700 ahead of two key Eurozone policy-relevant data releases; April CPI and Q1 GDP (both at 10:00am London). Headline CPI inflation is forecast to print at 2.4% y/y for a second consecutive month. Core CPI inflation is expected to drop to 2.7% y/y from 2.9% in March. The Eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June.
Meanwhile, Eurozone real GDP is expected to rise by only 0.1% q/q in Q1 after shrinking 0.1% the previous two quarters. Forward-looking survey indicators point to upside risk to growth. Looking at the country breakdown, Germany is expected at 0.1% q/q (9:00am London), Italy is expected at 0.1% q/q (9:00am London), and Spain is expected at 0.4% q/q (8:00am London). France printed a tick better than expected at 0.2% q/q vs. 0.1% in Q4.
GBP/USD is down on broad USD strength. UK BRC shop price inflation cooled sharply from 1.3% y/y in March to 0.8% y/y in April, lowest since December 2021. Shop price disinflation is unlikely to convince the BOE to move early with policy rate cuts. The BOE is more concerned with high and sticky services inflation. The UK March money and credit data is the next data highlight (9:30am London).
USD/JPY is consolidating around 157.00 following yesterday’s suspected BOJ intervention. Japan’s Vice Finance Minister for International Affairs Masato Kanda noted the government will disclose any intervention at end of May. Regardless, the price action suggests the BOJ stepped in.
When the BOJ intervened September 22, 2022 to the tune of ¥2.84 trillion, the trading range was 140.35-145.90 (5.6 yen range). When it intervened October 21, 2022 to the tune of ¥6.35 trillion, the range was 146.25-151.95 (5.7 yen range). Yesterday’s USD/JPY trading range was 160.17-154.54 (5.6 yen range) and market liquidity was thin due to Japan’s public holiday. As such, we suspect the amount was probably a bit less than ¥6.35 trillion intervention.
Japan economic data released overnight were mixed. In March, retail sales fell plunged 1.2% m/m (consensus: -0.2%, prior: 1.7%) and industrial production rose 3.8% m/m (consensus: 3.3%, prior: -0.6%). Overall, the BOJ will likely remain cautious tightening policy which can further weigh on JPY.
The recovery in Chinese economic activity remains unimpressive. The official manufacturing PMI dipped less than expected to 50.4 in April (consensus: 50.3) from 50.8 in March. The private survey Caixin manufacturing PMI came in stronger at 51.4 (consensus: 51.0) vs. 51.1 in March. However, services sector growth momentum is slowing faster than anticipated as the official non-manufacturing PMI dropped to 51.2 in April (consensus: 52.3) vs. 53.0 in March.
In our view, a sustained pick-up in Chinese economic growth is unlikely without policies that cause growth to shift from unproductive debt-fueled investment-led growth to consumption. With the PBOC still in easing mode and the Fed staying hawkish, downside pressure on CNY and CNH are intact. The PBoC may also come under increasing pressure to lift the USD/CNY fixing (weaken CNY) as the cross has traded near the 2% intra-day cap over the past several weeks.
AUD/USD is sharply lower and AU-US 10-year bond yield spreads narrowed. Australia consumer spending growth remains weak and significantly reduces expectations the RBA resumes its tightening cycle later this year. Retail turnover unexpectedly fell 0.4% m/m in March (consensus: +0.2%) following monthly rises of 0.2% in February and 1% in January. Cash rate futures slashed the probability of an RBA rate hike by December to 10% from 50% on Monday. There is scope for a further downward adjustment to Australian interest rate expectations against AUD because leading indicators point to a sluggish household spending outlook.
NZD is underperforming and NZ-US 10-year bond yield spreads narrowed. The sharp decline in New Zealand business confidence reinforces the case for RBNZ policy rate cuts later this year. The ANZ business expected own activity index fell 8 points to a seven-month low at 14.3. And, last week, the ANZ-Roy Morgan consumer confidence index dropped more than 4 points to an eleven-month low at 82.1.
New Zealand’s Q1 labour market report is up next (11:45pm London). Employment is expected at 0.3% q/q vs. 0.4% in Q4. The RBNZ pencils-in a 0.1% rise. The unemployment rate is expected at 4.3% vs. 4.0% in Q4, which is a tick higher than the RBNZ forecast of 4.2%. Finally, private wages are expected at 0.8% q/q vs. 1.0% in Q4 and is in line with RBNZ forecasts.
CAD and Canadian bonds will take their cue today from Canada’s February GDP report (1:30pm London). Canada’s economy is forecast to rise 0.3% m/m vs. 0.6% in January. But the 0.3% monthly decline in retail sales volumes in February points to downside risk to growth. If so, CAD can come under additional downside pressure.
