Dollar Remains Soft as New Week Begins

May 08, 2023

Win Thin

Markets are still digesting last week’s developments; the Fed releases its Senior Loan Officer Survey and its Financial Stability Report; the Fed’s weekly H.8 report Friday provided another piece of the puzzle; Chile’s Constitutional Council swung hard to the right
Germany reported weak March IP; ECB tightening expectations have fallen a bit
Minutes of the March 9-10 BOJ meeting were released; Australia is likely to post solid fiscal numbers in its fiscal blueprint tomorrow; Taiwan reported April trade data

The dollar remains under pressure as the new week begins. DXY is trading lower for the second straight day near 101.109 despite last Friday’s solid jobs report. The euro is trading higher near $1.1045 despite falling ECB tightening expectations (see below), while sterling traded at a new cycle high near $1.2660 and is testing the May 2022 high near $1.2665. Break above that would set up a test of the late April 2022 high near $1.3090. USD/JPY is inching higher after dovish BOJ minutes (see below) and traded back above 135 after trading as low as 133.50 last week. We had hoped that the First Republic deal would help address banking sector concerns but more clearly needs to be done. The latest H.4.1 and H.8 reports may be a start (see below). We had also hoped that a less dovish than expected FOMC decision would help the dollar but that didn’t happen and Fed rate cut expectations have actually picked up instead. So while recent data have been dollar-supportive, the dollar remains vulnerable until those major negative headwinds have been fully addressed. CPI and PPI data this week will be key to any dollar turnaround.

AMERICAS

Markets are still digesting last week’s developments. While Powell was widely regarded as signaling a pause, the strong jobs report Friday has seemingly upended the pivot. Or has it? At the start of last week, swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months. Now, it's seen in the 3.75-4.0% range in 12 months with three cuts still priced in by year-end. This expected rath is simply inconsistent with the data and with Fed forward guidance. Fed officials are likely to continue pushing back against this dovish take. Kashkari speaks today. However, the CPI and PPI data later this week are likely to have much greater impact than any Fed speakers this week.

The Fed releases its Senior Loan Officer Survey and its Financial Stability Report. Both are extremely important in light of recent developments in the banking sector. Markets will be braced for any signs of a credit crunch in the first one. That said, it may be too soon for any significant credit tightening to show up just yet. We think markets have a good idea of what the second one will say; for two straight meeting, the Fed has stressed that the banking system remains strong. However, we expect the Fed to highlight lapses in regulation and enforcement as key areas for improvement in order to preserve financial stability in the coming months.

The Fed’s weekly H.8 report Friday provided another piece of the puzzle. Through the week ending April 26, adjusted bank deposits appear to be stabilizing. However, the deposit data are lagged and so this latest reading didn’t pick up any of the deposit flight that we may have seen last week. That will have to wait until this Friday. However, the lack of any emergency borrowing from the Fed last week as shown in H.4.1 data suggests there won’t be much of a pickup in deposit flight. Regional bank shares are rallying today in pre-market trading due to the more constructive backdrop but of course remain vulnerable to swings in market sentiment. Stay tuned.

Only minor data will be reported. March wholesale trade sales and inventories are expected at 0.4% m/m and 0.1% m/m, respectively. Of note, the Atlanta Fed’s GDPNow model is currently tracking 2.7% SAAR growth for Q2, up from 1.8% previously and 1.1% in Q1. Next model update comes today after the data. Bloomberg consensus currently sees Q2 at 0.1% SAAR and Q3 at -0.9% SAAR.

Chile’s Constitutional Council swung hard to the right. This weekend’s vote saw right-wing candidates win 33 seats vs. 17 for left-wing candidates and should lead to a big rally in Chilean assets today. One seat went to an indigenous representative. The election of a new Council was necessary after proposed changes to the Constitution were soundly rejected in a vote last September. Those proposals were widely panned for swinging too far left for the majority of Chileans and this weekend’s vote validates the criticism. Looking ahead, the Council will take up work on an outline of the new constitution that will be written by a committee of 24 experts chosen by Congress. A national referendum on the new proposed Constitution is schedule for December 17. Of note, the big winner was the right-wing Partido Republicano and its leader Jose Antonio Kast, who would seemingly have the upper hand if there were to be a rematch of the 2021 election against President Boric.

EUROPE/MIDDLE EAST/AFRICA

Germany reported weak March IP. It came in at -3.4% m/m vs. -1.5% expected and a revised 2.1% (was 2.0%) in February. However, the y/y rate still improved to 1.8% vs. a revised 0.7% (was 0.6%) in February. Italy reports IP Wednesday and is expected at 0.3% m/m vs. -0.2% in February. Eurozone IP won’t be reported until May 15. Recent weakness in the German data has led us to downgrade our expectations for eurozone growth this year, as China reopening has had little impact on the European exporters so far.

ECB tightening expectations have fallen a bit. WIRP suggests another 25 bp hike is about 85% priced in for June 15. However, the odds of one last 25 bp hike September 14 have fallen to around 75% September 14 vs. fully priced in before the ECB meeting. Over the weekend, Knot said that the bank will continue to hike “as long as the underlying inflation hasn’t been tamped down. Our real problem at the moment is that core inflation is still too high.” Lane speaks later today and is likely to present a more dovish view. The split between the hawk and the doves clearly remains in place but it feels like the doves have taken control of the narrative, at least for now.

ASIA

Minutes of the March 9-10 Bank of Japan meeting were released. A few members of the MPC observed positive signs in terms of achieving the 2% inflation target. However, a few felt the bank should persistently continue with its current large-scale easing policy. However, one said it would still take time to assess the impact of BOJ policy on market functioning and one said that the bank must weight the risks of a hasty policy change. This was the last meeting under Kuroda. Of note, the summary of opinions for the April 27-28 meeting will be released Thursday. At both meetings, the bank stood pat but the April one will be of more interest since it was the first under Governor Ueda. So far, he has taken a very cautious approach that tilts quite dovish. That said, WIRP suggests odds of liftoff near 40% June 16, rising to over 50% July 28 and fully priced in December 19. However, the tightening path is expected to be quite shallow, with 15 bp of tightening over the next 12 months followed by another 15 bp over the subsequent 12 months.

Final April services and composite PMIs were reported. Services came in 52.9 vs. 52.5 preliminary, which dragged the composite up half a point to 55.4. This was the high for the cycle.

Australia is likely to post solid fiscal numbers in its fiscal blueprint tomorrow. Treasurer Chalmers is expected to project an -AUD5.35 bln (-$3.6 bln) deficit equal to -0.25% of GDP for the 12 months ending June 30. Some analysts are even predicting a small surplus due to strong export earnings and income tax revenues. The latest Bloomberg survey of 17 economists shows the median estimate for the 12 months ending June 2024 for an -AUD22.25 bln deficit equal to -0.8% of GDP, then rising for the following FY to -AUD35 bln equal to -1.5% of GDP. Chalmers noted that “The structural pressures on the budget actually intensify rather than ease after that. That is a focus of the budget too. We’ve got a structural challenge.” Still, Australia is in a much stronger fiscal position than nearly all of its DM counterparts.

Taiwan reported April trade data. Exports came in at -13.3% y/y vs. -19.4% expected and -19.1% in March, while imports came in at -20.2% y/y vs. -22.6% expected and -20.1% in March. This was the best showing for exports since December but still the eighth straight month of contraction. While the modest improvement is welcome, export orders are still contracting y/y and suggest little relief to shipments in the next six months.

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