Dollar Rally Cools

April 17, 2024

Dollar Rally Cools

  • Fed Chair Jay Powell signals it’s high for longer.
  • The UK March CPI print will keep the BOE cautious.
  • NZ’s Q1 CPI report weakens the case for RBNZ policy rate cuts in the near-term.

USD and Treasury yields are consolidating recent gains. Yesterday, Fed Chair Jay Powell echoed recent comments by other Fed officials and signalled patience before easing policy. Powell noted “the lack of further progress on inflation” adding it was “appropriate to let policy take further time to work”. Fed funds futures further trimmed odds of rate cuts across the curve with September going from more than fully priced to 90% priced-in. Cleveland Fed President Loretta Mester (voter) speaks later this evening and there’s a Q&A session (10:30pm London).

In our view, US economic outperformance remains a major theme underpinning USD strength. The IMF forecasts US real GDP growth of 2.7% in 2024. Over the same period the IMF projects the Eurozone, UK, Japan, Canada, and Other Advances economies to grow by 0.8%, 0.5%, 0.9%, 1.2% and 2.0%, respectively.

The Fed Beige Book (7:00pm London) and the US Treasury International Capital (TIC) data (9:00pm London) are today’s highlights. The Beige Book is expected to indicate again the US economy remains in a healthy state. It will be interesting to see if the updated view on prices supports the recent high CPI print. For reference, the March Beige Book highlighted that price pressures persisted, but several Districts reported some degree of moderation in inflation.

The TIC data will continue to show that underlying demand for USD remains robust. Net foreign purchases of long-term US securities (Treasury Bonds, gov’t bonds, corporate bonds & stocks) totalled over US$1060bn in January, more than offsetting the cumulative US February trade deficit of US$775.9bn.

GBP/USD rallied by over 0.4% towards 1.2470 on stickier than expected UK inflation. Annual headline and core CPI inflation slowed less than expected in March to 3.2% (consensus: 3.1%) and 4.2% (consensus: 4.1%). The monthly increase in headline CPI was also higher than anticipated at 0.6% (consensus: 0.4%) driven by higher prices for motor fuels. Importantly, services inflation remains high. Services CPI eased to 6% y/y from 6.1% in February, which was higher than the 5.8% y/y projected by market participants and the BOE. Bottom line: there is scope for UK interest rate expectations to adjust higher in favour of GBP.

EUR/USD is range-bound around 1.0620. Leading indicators (PMI, IFO, ZEW) point to improving Eurozone growth prospects. Nonetheless, Eurozone disinflationary pressures suggests the ECB is on a firm path to start easing in June (87% priced-in). In contrast, the Fed is in no rush to loosen policy. As such, narrowing EU-US bond yield spreads remain a drag on EUR/USD. The Eurozone final March CPI print is up next (10:00am London) and a few ECB speakers are scheduled to speak including President Lagarde (7:00pm London).

USD/CAD is holding above 1.3800. Bank of Canada (BOC) Governor Tiff Macklem did not offer much policy guidance during yesterday’s fireside chat but acknowledged “there’s some downward momentum in underlying inflation”. Indeed, Canada’s CPI-trim and CPI-median eased in March to 3.1% (lowest since June 2021) and 2.8% (matching the July 2021 low), respectively. Momentum in CPI-trim and CPI-median has also cooled sharply under the BOC’s 2% target, with annualized growth on a three-month basis of 1.4% and 1.1%, respectively.

Bottom line: BOC has room to start easing in June (70% priced-in) which can further weigh on CAD. Canada’s 2024 budget has neutral monetary policy implications. The budget deficit is projected to shrink from 1.4% of GDP in 2023/2024 to 1.3% in 2024/2025 and 1.2% in 2025/2026. Canadian 10-year bond yields remained steady around 3.73%.

NZD is outperforming most major currencies. New Zealand’s Q1 CPI report was mixed and weakens the case for RBNZ policy rate cuts in the near-term. In fact, New Zealand interest rate futures pushed-out the timing of a first rate cut by a month to November and curtailed the pricing of total easing for 2024 by over 10bps to 30bps.

In line with consensus, New Zealand headline CPI increased in March by 0.6% q/q and slowed to 4% y/y (lowest since June 2021) from 4.7% in February. However, the headline CPI print was higher than the RBNZ projected (0.4% q/q and 3.8% y/y) and domestic price pressure picked-up faster than expected. Non-tradeable prices rose 1.6% q/q (consensus: 1.3%, RBNZ: 1.1%) from 1.1% in Q4 2023. Encouragingly, the RBNZ’s core inflation gauge - sectoral factor model - slowed to 4.3%, the weakest since Q4 2021 but is still far from the RBNZ’s 1-3% inflation target.

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