Dollar Rally Picks Up Steam

March 28, 2024

Win Thin

Governor Waller remains a leading hawk on the FOMC; S&P affirmed its AA+ rating on the U.S. and maintained a stable outlook; March Chicago PMI will be the data highlight; Canada highlight will be January GDP data
ECB remains on track to cut rates in June; eurozone reported February money supply data; Germany reported weak retail sales; some BOE policymakers remain hawkish; revised U.K. Q4 GDP still contracted
BOJ released the summary of opinions from the March 18-19 policy meeting; Australia reported February private sector credit and retail sales; New Zealand reported very weak March sentiment indicators; RBNZ Governor Orr made some dovish comments

The dollar rally is picking up steam. A combination of hawkish Fed comments and weak European data helped DXY trade today at the highest since February near 104.727. It is on track to test the mid-February high near 105. Helped by weak German retail sales data, the euro traded today at the lowest since February near $1.0755 and is on track to test its mid-February low near $1.07. Sterling is holding up better after some hawkish BOE comments but is still trading lower near $1.2615. The yen is trading sideways on intervention risks, with USD/JPY flat near 151.40. The dollar recovery should continue after this period of consolidation, not just on hawkish Fed repricing but also from dovish developments from other central banks. The U.S. data continue to come in mostly firmer and it’s clear from Waller’s comments (see below) that many Fed officials remain very cautious about easing too much or too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain even further.

AMERICAS

Governor Waller remains a leading hawk on the FOMC. He said that “In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data.” Waller added that “I see economic output and the labor market showing continued strength, while progress in reducing inflation has slowed. Because of these signs, I see no rush in taking the step of beginning to ease monetary policy.” Waller stressed that “I continue to believe that further progress will make it appropriate for the FOMC to begin reducing the target range for the federal funds rate this year. But until that progress materializes, I am not ready to take that step.” Lastly, he added that “Fortunately, the strength of the US economy and resilience of the labor market mean the risk of waiting a little longer to ease policy is small and significantly lower than acting too soon.” Odds of a June cut have fallen to 66% vs. 85% at the start of this week.

S&P affirmed its AA+ rating on the U.S. and maintained a stable outlook. The ratings agency said, "The outlook remains stable, indicating our expectation of continued economic resiliency; proactive, effective monetary policy execution; and our view that government officials will continue to resolve near-term fiscal deadlines, such as addressing the debt ceiling, in a timely manner." S&P noted that the U.S. retains many advantages but warned “comparatively weak fiscal indicators that continue to constrain the sovereign credit rating offset those strengths. Bipartisan cooperation to strengthen the US fiscal profile - namely to meaningfully lower deficits and tackle budgetary rigidities - remains elusive.” Recall that S&P was the first to downgrade the U.S. rating from AAA in back August 2011. Fitch followed suit in August 2023, leaving only Moody’s at Aaa.
March Chicago PMI will be the data highlight. Headline is expected at 46.0 vs. 44.0 in February. Last week, S&P Global preliminary March PMIs came in mixed, with the composite falling to 52.2 vs. 52.5 in February. ISM PMIs won’t be reported until next week.

Regional Fed surveys for March will continue rolling out. Kansas City Fed manufacturing index is expected to remain steady at -4. It will report its services index will be reported tomorrow. Final March University of Michigan consumer sentiment and weekly jobless claims will also be reported today.

More housing data will be reported. February pending home sales are expected at 1.5% m/m vs. -4.9% in January. Earlier this week, new home sales came in softer than expected but last week, existing home sales, housing starts, and building permits all came in much stronger than expected as the housing sector generally continues to recover.

We get another revision to Q4 GDP data. Growth is expected to remain unchanged at 3.2% SAAR. However, this is old news as markets are already looking ahead to Q1 and Q2. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.1% SAAR and will be updated tomorrow after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 1.9% SAAR, up from 1.8% previously. Looking ahead, it is tracking Q2 growth at 2.2% SAAR, up from 2.1% previously. This model will also be updated tomorrow.

Canada highlight will be January GDP data. Growth is expected at 0.4% m/m vs. 0.0% in December, while the y/y rate is expected at 0.8% vs. 1.1% in December. However, softness in retail sales, manufacturing sales, and wholesale trade in January points to downside risks to GDP growth. In turn, slowing activity and falling inflation have pushed forward Bank of Canada easing expectations, with odds of a June cut now around 75% vs. less than 50% at the start of last week.

EUROPE/MIDDLE EAST/AFRICA

The ECB remains on track to cut rates in June. Governing Council member Panetta said that “The ECB’s restrictive monetary policy is compressing demand and contributing, along with the drop in energy prices, to the rapid reduction of inflation. Risks for price stability have decreased and the conditions for a monetary loosening are coming about.” Official messaging has led the market to largely price in the first cut at the June 6 meeting. Cuts are then fully priced in for September 12 and October 17, while the market sees around 65% odds of a fourth cut December 12. Villeroy speaks later today.

Eurozone reported February money supply data. M3 came in a tick higher than expected at 0.4% y/y vs. 0.1% in January. This was the third straight month of positive growth and the strongest since June 2023. The contribution to M3 growth from private sector credit remained under 1% y/y, reflecting subdued aggregate growth in bank lending. The data are consistent with unimpressive economic activity and contained inflation pressures.

Germany reported weak retail sales. February sales came in at -1.9% m/m vs. 0.4% expected and a revised -0.3% (was -0.4%) in January, while the y/y WDA rate fell to -2.7% and was the weakest since September. Germany remains the weak link in the eurozone economy. Elsewhere, March unemployment remained steady as expected at 5.9%.

Some BOE policymakers remain hawkish. After Mann warned this week that the market is pricing in too many rate cuts this year, fellow MPC hawk Haskel warned that interest rate cuts are “a long way off” and noted he favors a slower pace of cuts when easing starts. Recall that both Mann and Haskel switched their votes in March to keeping the bank rate on hold after supporting a 25 bp rate hike the past several meetings. The market now sees 70% odds of a cut June 20, down from 85% at the start of this week but up from 50% at the start of last week. A total of three cuts in 2024 are still priced in.

Revised U.K. Q4 GDP still contracted. The final print of -0.3% q/q was unchanged from the preliminary and confirms that the economy fell into a technical recession last year. Net exports and government spending improved, but this was offset by weaker GFCF and business investment. Forward-looking indicators already point to an encouraging recovery in economic activity, with Bloomberg consensus for Q1 growth currently at 0.2% q/q. Meanwhile, the UK current account deficit widened to 3-.1% of GDP in Q4 vs. -2.7% in Q3.

ASIA

Bank of Japan released the summary of opinions from the March 18-19 policy meeting. At that meeting, the BOJ raised the policy rate from -0.10% to a target range of 0 to 0.10% and ended yield curve control. One board member felt that “The bank would need to emphasize its cautious stance in the case of terminating the negative interest rate policy. Japan’s economy is not in a state where rapid policy interest rate hikes are necessary.” Another member felt that “It is important to clearly communicate through the use of various methods that the changes in the monetary policy framework proposed at this monetary policy meeting will not be a regime shift toward monetary tightening.” The summary reflects the dovish forward guidance by the bank, which has led to markets to price in the next 10 bp hike at the September meeting. Only 50 bp of total tightening is seen over the next three years and this should continue to weigh on the yen.

Australia reported February private sector credit and retail sales. Retail turnover came in a tick lower than expected at 0.3% m/m vs. 1.1% in January. However, according to the Australian Bureau of Statistics, seven sold-out Taylor Swift concerts in Sydney and Melbourne boosted retail spending in February via spending on clothing, merchandise, accessories, and dining out. Looking beyond the one-off “Swiftie” effect, underlying spending in Australia is stagnating and retail turnover rose by only 0.1% in trend terms for a third consecutive month. Meanwhile, February private sector credit came in a tick higher than expected at 0.5% m/m. The risks are rising of a sharper easing cycle than is currently implied by cash rate futures, which sees 50 bp of easing in 2024. AUD is trading heavy and has broken below key technical support near 0.6500, which sets up a test of the October low near 0.6270.

New Zealand reported very weak March sentiment indicators. The ANZ consumer confidence index fell sharply to a seven-month 86.4 vs. 94.5 in February, while the ANZ business activity outlook survey fell sharply to a six-month low of 22.5 vs. 29.5 in February. The weaker outlook has weighed on NZD, which is trading at the lowest since mid-November near 0.5955 and on track to test the October low near 0.5775.

RBNZ Governor Orr made some dovish comments. Specifically, he fueled rate cut bets by pointing out that “aggregate demand is slowing, core inflation pressures are coming off and inflation expectations are coming back to target, so we hope that we can see low and stable inflation on the horizon again and that would mean more normalized interest rates on the horizon.” New Zealand interest rate futures are pricing in roughly 75 bp of easing in 2024, starting in August. In contrast, the RBNZ has the first rate cut penciled in for Q2 2025.

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