Dollar Mixed

May 21, 2024

Dollar Mixed

  • Higher-for-longer Fed policy rate environment is supporting Treasury yields and USD.
  • Canada inflation is projected to slow in April. Hungary’s central bank is expected to cut rates 50bps to 7.25%.
  • The RBA May meeting minutes suggests the bar to ease policy is high.

USD retraced about half of last week’s losses underpinned by a modest recovery in 2 and 10-year Treasury yields. The higher-for-longer Fed policy rate environment is supporting Treasury yields as Fed funds future pricing for a first rate cut in September fell to 70% from 100% last week.

Yesterday, Cleveland Fed President Loretta Mester (voter) said she no longer thinks three rate cuts for 2024 is appropriate adding that “risks that we’re too restrictive have gone down”. Fed Vice Chair Philip Jefferson also warned that it’s “too early to tell if disinflation slowdown will last” while Fed Vice Chair for Supervision Michael Barr noted “we will need to allow our restrictive policy some further time to continue to do its work”. Finally, Atlanta Fed President Raphael Bostic (voter) pointed out again that “it's going to take a while before we are certain inflation is going back down to 2%”.

Today’s Fed speakers include: Richmond Fed President Thomas Barkin (voter) (2:00pm London), Fed Governor Christopher Waller (2:00pm London), New York Fed President John Williams (2:05pm London), Bostic (2:10pm London), and Barr (4:45pm London). The Philly Fed non-manufacturing index is the data highlight (1:30pm London).

A bigger test for USD this week will come Thursday following the May PMI readings for the US, EU, and UK. The PMI prints will determine if economic growth momentum is indeed shifting from the US towards other major economies. If so, bond yield spreads between the US and other major economies can narrow further against USD. Otherwise, USD can find a firmer footing.

GBP/USD is range-bound above 1.2700. The UK CBI May industrial Trends Survey is unlikely to generate material volatility (11:00am London). Bank of England (BOE) Governor Andrew Bailey delivers a lecture later today (6:00pm London). Recall, Bailey emphasized following the May 9 BOE meeting that a June rate cut is “neither ruled out nor a fait accompli” with each meeting evidence based. The likelihood of a June BOE rate cut is currently a coin toss.

EUR/USD is holding above 1.0850. The Eurozone’s March current account balance and Q1 labour costs data are up next (9:00 and 10:00am London, respectively). The current account surplus totalled 2% of GDP in February and should help cushion EUR/USD undershoots beyond fundamental equilibrium. Our adjusted PPP model estimates EUR/USD long-term equilibrium at around 1.1050.

CAD will take its cue today from Canada’s April CPI report (1:30pm London). Headline inflation is expected to slow to a three-year low at 2.7% y/y from 2.9% in March. Core trim is expected to dip two ticks to 2.9% y/y while core median is expected to fall a tick to 2.7% y/y. Faster progress on disinflation will raise odds of a June Bank of Canada policy rate cut. Interest rate futures imply 45% odds of a cut in June and a July rate cut is more than fully priced-in.

AUD/USD is heavy near 0.6660 as equity markets in Asia declined. The RBA May meeting minutes suggests the bar to ease policy is high which limits AUD downside. At the May 6-7 meeting, the RBA considered raising the cash rate or holding it steady. According to the minutes, the case to leave the cash rate unchanged was the stronger one as “members judged that it remained reasonable to look through short-term variation in inflation to avoid excessive fine-tuning”.

Australia’s poor consumer sentiment complicates the RBA policy rate outlook. The Westpac Melbourne Institute Consumer Sentiment Index fell 0.3% m/m to a five-month low at 82.2 on cost-of-living pressures and inflation concerns. According to Westpac “while expectations improved a touch in May, this was overshadowed by a further deterioration in current conditions and fears that persistently high inflation may require further interest rate rises”.

National Bank of Hungary is expected to cut rates 50bps to 7.25% (1:00pm London). At the last meeting April 23, the bank kept cut rates 50 bp to 7.75%. Deputy Governor Virag said that a 6.75-7.00% base rate by end-June was “realistic” but added that room for rate cuts in the second half of this year is limited. This would imply another 50 bp of cuts at the June policy meeting, bringing the policy rate to 6.75% by mid-year. Of note, the swaps market sees the base rate at 7.00% over the next three months and 6.75% over the subsequent six months.

RBNZ meets tomorrow and is expected to keep rates steady at 5.50% (3:00am London). The RBNZ will release its Monetary Policy Statement with updated macro forecasts at the same time. The bank should reiterate “interest rates need to remain at a restrictive level for a sustained period.” The focus will be on the updated rate path projections. The RBNZ currently forecasts the Official Cash rate (OCR) to peak at 5.60% in Q3 2024, implying 40% odds of another 25bps rate hike. In our view, the revised RBNZ projections will rule out an additional policy rate increase which can weigh on NZD. New Zealand inflation remains high but is in a firm downtrend, labor market pressures are easing rapidly as employment unexpectedly dropped 0.2% in Q1, and business and consumer surveys point to sluggish growth.

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