Dollar Gains Some Traction Ahead of the Weekend

May 17, 2024

Win Thin

Fed officials remains very cautious; Q2 growth remains robust
The ECB hawks control the narrative
A majority of Japan companies view the weak yen as a negative; China announced plans to support its property market; China reported mixed April IP, retail sales, and FAI; China also reported weak housing data

The dollar continues to gain some traction ahead of the weekend. DXY is trading higher for the second straight day near 104.75. However, the clean break below 104.887 still sets up a test of the April low near 103.880. The euro is trading lower near $1.0845 while sterling is trading lower near $1.2655. USD/JPY is trading higher near 155.90 even as Japan companies complain of the negative impact of a weak yen (see below). Markets gave a collective yawn to the housing support plan from China (see below). Despite somewhat favorable PPI/CPI data this week, we believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. As such, we look for the dollar to eventually recover. Indeed, most Fed officials continue to signal that rate cuts are not imminent (see below).

AMERICAS

Fed officials remains very cautious. Barkin said, “To get to 2% sustainably in the right kind of way, I just think it’s going to take a little bit more time.” Williams said, “I don’t expect to get that greater confidence that we need to see on the inflation progress towards a 2% goal in the very near term.” Mester said, “Incoming economic information indicates that it will take longer to gain that confidence. Holding our restrictive stance for longer is prudent at this point as we gain clarity about the path of inflation.” Bostic said, “it could be appropriate for us to reduce rates toward the end of the year.” Waller, Kashkari, and Daly speak today. Kugler gives a commencement speech Saturday and Powell does the same Sunday.

Q2 growth remains robust. The New York Fed’s Nowcast model is tracking 2.2% SAAR and will be updated today. Its initial read for Q3 growth will be released in early June. Elsewhere, the Atlanta Fed’s GDPNow model is tracking Q2 growth at 3.6% SAAR and will be updated next Friday after the data. Only data today is April leading index, which is expected at -0.3% m/m.

EUROPE/MIDDLE EAST/AFRICA

The ECB hawks control the narrative. Schnabel said “Based on current data, a rate cut in July does not seem warranted. We should look very carefully at the data because there is a risk of easing prematurely.” The bank remains on track to cut rates starting in June. After that, cuts are largely priced in for September and December. Of note, Kazaks said he was “relatively fine” with current market pricing. Villeroy said “We have enough confidence to start to cut rates probably very soon. The probability of a rate cut by our next meeting on June 6 is, how could I say, significant.” Vasle, Guindos, Vujcic, Holzmann, and Kazaks speak today.

ASIA

A majority of Japan companies view the weak yen as a negative. According to a report by Teikoku Databank, nearly 65% of firms surveyed said the recent depreciation of the yen has eroded their profits, mostly because they weren’t able to pass on rising raw materials costs to customers via higher prices. Of noted, 8% of firms surveyed saw a positive impact. About half of the surveyed companies said a USD/JPY exchange rate between JPY110-120 would be appropriate. Teikoku Databank surveyed 1,046 companies, including both exporters and importers. The weak yen certainly hasn’t helped the economy. Q1 GDP contracted -0.5% q/q vs. a revised flat reading (was 0.1%) in Q4, with net exports subtracting -0.3 ppt. GDP hasn’t grown since Q2 2023.

As reports suggested earlier this week, China announced plans to support its property market. People’s Bank of China effectively scrapped the minimum mortgage interest rate and cut the minimum down payment ratio to 15% for first-time buyers and 25% for second homes, both down five percentage points. Policymakers also said local governments should buy unsold homes at “reasonable” prices and turn them into affordable housing. In that regard, PBOC will establish a nationwide program to provide CNY300 bln ($41.5 bln) at a rate of 1.75% to help state-owned companies buy unsold homes. While this is encouraging news and could help ease China’s property slump, it does not deal with the root cause of China’s structural economic headwind: its inability to rebalance the economy away from unproductive debt-fueled, investment-led growth and towards sustainable consumption-led growth. Indeed, it appears that the plan will end up boosting debt even more.

China reported mixed April IP, retail sales, and fixed asset investment data. IP came in at 6.7% y/y vs. 5.5% expected and 4.5% in March, sales came in at 2.3% y/y vs. 3.7% expected and 3.1% in March, and FAI came in at 4.2% YTD vs. 4.6% expected and 4.5% in March.

China also reported weak housing data. Property investment came in at -9.8% YTD vs. -9.6% expected and -9.5% in March, while residential property sales came in at -31.1% YTD vs. -30.7% in March.

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