Dollar Rally Pauses

June 27, 2024
  • Financial conditions are the loosest since November 2021; we get another revision to Q1 GDP; regional Fed manufacturing surveys for June will wrap up; the first debate between President Biden and former President Trump takes place tonight; Mexico is expected to keep rates steady at 11.0%
  • ECB is sending mixed messages; eurozone reported May money supply data; BOE published its financial stability report; Riksbank delivered a dovish hold; Czech Republic is expected to cut rates 25 bp to 5.75%; Turkey is expected to keep rates steady at 50.0%
  • Jawboning on the yen has picked up; Japan announced a rare unscheduled revision to Q1 GDP; Japan reported solid May retail sales; June ANZ consumer and business surveys for New Zealand were soft; Philippines kept rates steady at 6.5%, as expected

The dollar rally is taking a breather. DXY is trading lower near 105.897 after trading at a new cycle high near 106.13 yesterday. it remains on track to test the April-May highs near 106.50. USD/JPY is trading lower near 160.50 after trading at the highest since 1986 yesterday near 160.85. Markets remain wary of BOJ intervention as jawboning picks up (see below). The euro is trading higher near $1.07 while sterling is trading higher near $1.2655. SEK is underperforming after the Riksbank delivered a dovish hold (see below). Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place, and so the Fed remains in hawkish mode. At the same time, weaker data in many of the major economies underscore the widening economic and monetary policy divergences that should continue to support the dollar.


Financial conditions loosened for the 9th straight week and are the loosest since November 2021. Yes, November 2021. There is simply no pressure on the Fed to cut rates right now. The market agrees and sees only 10% odds of a cut in July and 65% in September. A November cut is fully priced in.

We get another revision to Q1 GDP. Growth is expected to be revised up a tick to 1.4% SAR. Of course, this is old news as markets look ahead to Q2 and Q3. The Atlanta Fed GDPNow model is currently tracking Q2 growth at 3.0% SAAR and will be updated today after the data. Elsewhere, the New York Fed Nowcast model is tracking Q2 at 1.9% SAAR and Q3 at 2.2% SAAR and will be updated tomorrow. However you slice it, the U.S. economy remains robust.

Regional Fed manufacturing surveys for June will wrap up. Kansas City manufacturing is expected at -5 vs. -2 in May. Kansas City services will be reported tomorrow and stood at 11 in May.

Housing data for May will remain in focus. Pending home sales are expected at 0.5% m/m vs. -7.7% in April. Yesterday, new home sales came in at -11.3% m/m vs. -0.2% expected and a revised -2.0% (was -4.7%) in April. Last week, existing home sales came in at -0.7% m/m vs. -1.0% expected and -1.9% in April.

The first debate between President Biden and former President Trump takes place tonight. The debate begins at 900 PM ET (0200 GMT). With a little more than four months before the November 5 election, polls continue to point to a tight race. However, the betting markets continue to price in a Trump win.

Banco de Mexico is expected to keep rates steady at 11.0%. At the last meeting May 9, the bank kept rates steady after starting the easing cycle at the March 21 meeting with a 25 bp cut. Recent weakness in MXN poses upside risks to inflation and will keep the bank cautious. The swaps curve has adjusted higher since the May meeting and is pricing in around 100 bp of easing over the next 12 months vs. 125 bp at the start of May. May trade data will also be reported today.


The ECB is sending mixed messages. Most ECB officials have been pushing back against market easing expectations even as they counsel a data-dependent approach to policy. They can’t have it both ways and yet Kazimir said “I think we could expect one more interest-rate cut this year. I still see a significant risk of rising inflation, which may not fully align with our expectations. I expect this pressure of possible price increases mainly from wage growth.” On the other hand, Lane said “The central bank will be agile. If there’s upside surprises, clearly we’re going to do less,” he said. “We’re ready if there are downside surprises where we can move more quickly.” Currently, the market sees nearly 80% odds of a cut in September, with another cut nearly priced in for December.

Eurozone reported May money supply data. Broad monetary growth (M3) came in a tick higher than expected at 1.6% y/y vs. 1.3% in April. This was the strongest since March 2023. Overall, credit dynamics are improving yet remain very weak by historical standards.

The Bank of England published its financial stability report. The bank focused on potential stresses to the U.K. financial system with the introduction of its first System Wide Exploratory Scenario. It said initial results showed non-banks would see “significant” liquidity needs from margin calls during a hypothetical shock worse than that caused by the 2022 mini-budget or the coronavirus pandemic. The BOE also warned of potential problems in private equity, noting “Improved transparency over valuation practices and overall levels of leverage would help to reduce vulnerabilities in the sector. Risk management practices in some parts of the sector also need to improve, including among lenders to the sector such as banks.” The BOE added that “In a higher-rate environment, higher financing costs create an increased drag on the performance of indebted PE companies, which makes it challenging for PE sponsors to exit their investments.”

Riksbank delivered a dovish hold. It kept rates steady at 3.75%, as expected, but warned “the policy rate can be cut two or three times during the second half of the year.” Previously, the policy guidance was “the policy rate is expected to be cut two more times during the second half of the year.” Macro forecasts were update, with both CPI and CPIF inflation revised down significantly for 2024 and 2025. Monetary policy divergence between Riksbank and Norges Bank suggests NOK/SEK can edge higher. Unlike the Riksbank, the Norges Bank is in no rush to start easing. There are only three policy meetings in H2; the market sees 85% odds of a cut in August, 70% of a second cut in September, and around 50% odds of a third cut November. If the Riksbank is to be believed, those odds of a November cut should be higher. Stay tuned.

Czech National Bank is expected to cut rates 25 bp to 5.75%. However, 5 of the 25 analysts polled by Bloomberg see a larger 50 bp cut. Governor Michl recently said, “the debate on June 27 will be whether to repeat a 50 bp cut or make a 25 bp reduction.” Michl added “even if we cut by 50 bp, we will still send a clear message that rates will be higher for longer.” At the last meeting May 2, all seven bank board members voted to cut rates 50 bp for the third straight time after starting the easing cycle at the December meeting with a 25 bp cut. The market is pricing in 75 bp of total easing over the next 12 months.

Turkey central bank is expected to keep rates steady at 50.0%. At the last meeting May 23, the bank kept rates steady for the second straight meeting after delivering a surprise 500 bp hike at the March 21 meeting. With core inflation seemingly topping out, the risk is the central bank delivers a dovish hold. The swaps market is pricing in 150 bp of easing over the next three months followed by another 600 bp of easing over the subsequent three months. The risk is that the market is underestimating how sticky inflation may be.


Jawboning on the yen has picked up. Finance Minister Suzuki said “It is desirable for the exchange rate to move in a stable manner. Sudden, one-sided moves are not desirable. We are strongly concerned about the impact on the economy. We will analyze the background to this move with a high sense of urgency, and take necessary action as needed.” USD/JPY traded yesterday at the highest level since December 1986 near 160.85 but has since dropped back to trade near 160.50. But make no mistake, it will continue to rise until the monetary policy divergences narrow and we are nowhere near that yet. Of note, there are no significant chart points between here and the pre-Plaza Accord highs above 250 and so we'll just have to stick with round number targets like 165.

Japan announced a rare unscheduled revision to Q1 GDP on July 1. Officials said the revision would reflect recent downward corrections to construction orders data. Reports suggest it could lead to a sharp downgrade from the current -0.5% q/q reading and if the revision is large enough, it could lead to downward revisions to the BOJ’s growth forecasts when they are updated for the July meeting.

Japan reported solid May retail sales. Sales came in at 3.0% y/y vs. 2.0% expected and actual in April. IP and housing starts will be reported tomorrow and are expected flat y/y and -6.2% y/y, respectively. However, the drop in the composite PMI to 50.0 in June warns of growing headwinds and downside risks for the economy ahead. No wonder the BOJ remains so cautious.

June ANZ consumer and business surveys for New Zealand were soft. Consumer confidence dipped 2% m/m to 83.2 in June and remains well below the 20-year average of 114.0. Meanwhile, business Own Activity Outlook index stabilized near a 10-month low of 12.2 in June while confidence fell to 6.1, the lowest since September. However, inflation indicators improved. Cost Expectations, Pricing Intensions, and Inflation Expectations indexes all edged lower to multi-year lows in June. The readings all point to weak economic activity but easing inflation pressures. This reinforces the case for the RBNZ to start easing earlier than projected, which can further weigh on NZD. The RBNZ has the first rate cut penciled in for Q3 2025. In contrast, the market has fully priced in a cut this November. That’s about right in our view.

Philippines central bank kept rates steady at 6.5%, as expected. However, it was a dovish hold as Governor Remolona said, “The balance of risks to the inflation outlook has shifted to the downside for 2024 and 2025 due largely to the impact of lower import tariffs on rice.” He added that this makes an August rate cut somewhat more likely than before and that a total 50 bp of easing this year was possible. Of note, the market is pricing in 75 bp of easing in H2.

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