Dollar Remains Soft as New Week Begins

February 26, 2024

Win Thin

The Fed has been very clear about its reluctance to cut rates too soon; housing data will be in focus; regional Fed surveys for February will continue rolling out
EUR/CHF is trading at the highest since late November; several central bank officials are scheduled to speak; U.K. CBI reported a strong February distributive trades survey; Israel is expected to cut rates 25 bp to 4.25%
Iron ore prices fell to the lowest in nearly four months

The dollar remains soft as the new week begins. DXY is trading lower near 103.773 and a clean break below 103.694 sets up a test of the February low near 102.901. The euro is trading higher near $1.0855, while sterling is trading higher near $1.27. EUR/CHF is trading at the highest since late November (see below) while USD/JPY is trading higher near 150.60 as improving market sentiment takes a toll on the safe havens. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon and the markets are finally coming around to our view. The data continue to come in mostly firmer while Fed officials remain very cautious about easing too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should see further gains after this current period of consolidation.

AMERICAS

The Fed has been very clear about its reluctance to cut rates too soon. Markets are finally beginning to listen. The odds of a March cut have fallen to basically zero, while the odds of a May cut have fallen to around 20%. More importantly, the June cut that was fully priced in at the start of last week has seen those odds fall below 80%. It's all going to depend on how the data continue to come in but if we had to pick a side, we think the risks of a cut are tilted towards coming later than June, not sooner. Fed officials have been remarkably consistent since the January FOMC meeting. We expect this to continue into the March 19-20 meeting. Schmid speaks today.

Housing data will be in focus. January new home sales are expected at 3.0% m/m vs. 8.0% in December. Mortgage rates have been rising in February and so the housing sector recovery may be at risk.

Regional Fed surveys for February will continue rolling out. Dallas Fed manufacturing index is expected at -14.0 vs. -27.4 I January. So far, the Empire and Philly Fed manufacturing surveys have come in stronger than expected and corroborate the improvement seen in the wider PMI surveys.

EUROPE/MIDDLE EAST/AFRICA

EUR/CHF is trading at the highest since late November. The November high near 0.96851 is within sight, but first the pair must get through the 200-day moving average that comes in near 0.95692. Monetary policy divergence is at the heart of this trade, with Swiss easing expectations picking up as the economy slows and inflation sinks further below the 2% target. Q4 GDP data out Thursday is expected to show the economy barely growing at 0.1% q/q. The market sees nearly 55% odds that the SNB starts cutting rates at the March 21 meeting, which would make it the first of the major central banks to cut. On the other hand, the ECB has so far successfully pushed back market easing expectations to June. We also believe improving market risk sentiment is weighing on the Swiss franc as well as the yen.

Several central bank officials are scheduled to speak today. However, based on the topic of discussions, we doubt any new policy guidance will be offered. ECB Governing Council member Vujcic, BOE Deputy Governor Breeden, BOE Chief Economist Pill, ECB GC member Stournaras, and ECB President Lagarde all speak.

U.K. CBI reported a strong February distributive trades survey. Retailing reported sales came in at -7 vs. -31 expected and -50 in January, while total reported sales came in at 5 vs. -33 in January. Retailing was the highest since April 2022 and suggests that the 3.4% m/m bounce in January retail sales was not a fluke. February BRC shop price index will be reported later today and is expected at 2.5% y/y vs. 2.9% in January. Like the U.S., it appears that the U.K. may be entering its Goldilocks phase.

Bank of Israel is expected to cut rates 25 bp to 4.25%. However, the market is split as over a third of the analysts polled by Bloomberg see steady rates. At the last meeting January 1, the bank started the easing cycle with a 25 bp cut to 4.5%. However, Governor Yaron warned that fiscal stimulus tied to the war could hinder further easing. The swaps market is pricing in 100-125 bp of total easing over the next 12 months that would see the policy rate bottom between 3.25-3.50%.

ASIA

Iron ore prices fell to the lowest in nearly four months. Steel inventories are reportedly piling up in China as the housing sector there continues to struggle. Of note, major iron ore producer Vale recently said that it’s seeking to increase its sales outside of China, which suggests the company sees limited prospects there right now. All of this suggests headwinds for the Australian economy are likely building, and that the recent improvement in exports may be running out of steam. It reports January trade data March 7.

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