Dollar Smiles as Risk Off Impulses Intensify

June 04, 2024
  • A risk off vibe is creeping into global markets; ISM manufacturing PMI for May was soft; Q2 growth remains solid, if not unspectacular; May JOLTS data will be the highlight
  • The first televised U.K. election debate will be tonight; U.K. BRC sales remain soft; Switzerland reported May CPI; South Africa reported weak Q1 GDP data
  • Japan officials sound confident about FX intervention; BOJ may discuss reducing its bond purchases as early as next week’s meeting; Australia data points to soft Q1 GDP growth; early returns suggest the ruling BJP may lose its single party majority in India; Korea reported May CPI
  • Oil prices continue to sink after OPEC+ signaled an earlier than expected end to its output cuts

The dollar is trading firm as risk off impulses pick up. USD, JPY, and CHF are outperforming while EM FX and growth-sensitive majors are underperforming. DXY is trading higher near 104.265 after trading below 104 earlier today. The euro is trading lower near $1.0870 while sterling is trading lower near $1.2755. USD/JPY is trading back below 155 for the first time since May 16 and is on track to test that day’s low near 153.60. MXN is the worst performer in EM FX for the second straight day after the weekend elections, while INR is weak today after another election surprise in India (see below). We believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. Markets have taken back the dovish Fed easing expectations and yields have been steadily rising. More importantly, today’s price action suggests the so-called dollar smile remains in play. As such, we look for the dollar recovery to continue.


A risk off vibe is creeping into global markets. USD, JPY, and CHF are outperforming today while EM FX remains under pressure. Commodity prices are sinking, while global equity markets are largely lower. We can’t point to any single driver that triggered this move. Potential concerns about the U.S. economy may be playing a role, as it remains the driver of global growth. We also got some negative political surprises from EM (see below), while optimism on China is clearly ebbing. Either way, today’s price action suggests that the so-called dollar smile remains in play.

ISM manufacturing PMI for May was soft. Headline came in at 48.7 vs. 49.5 expected and 49.2 in April. The details were mostly softer too, with new orders at 45.4 vs. 49.1 in April and production at 50.2 vs. 51.3 in April. One bright spot was employment, which rose to 51.1 vs. 48.6 in April. Supplier deliveries remained steady at 48.9, while the backlog of orders fell to 42.4 vs. 45.4 in April. The lower these readings are, the less stress there is in supply chains. This suggests that the drop in prices paid to 57.0 vs. 60.9 in April was due in part to easing supply constraints. Either way, this is good news for the Fed, to state the obvious. ISM services will be reported tomorrow, and headline is expected at 51.0 vs. 49.4 in April.

Q2 growth remains solid, if not unspectacular. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 1.8% SAAR and will be updated Thursday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q2 growth at 1.8% SAAR and will be updated Friday. It should also release its first estimate for Q3 growth Friday.

May JOLTS data will be the highlight. Job openings are expected at 8.360 mln vs. 8.488 mln in April. Openings have been trending lower but not by enough to lead to a higher unemployment rate. The job opening rate remains above the 4.5% threshold that’s consistent with a significant increase in the unemployment rate. Moreover, the ratio of job vacancies to people looking for work has come into better balance.


The first televised head-to-head debate between Rishi Sunak and Keir Starmer will be tonight (900 PM GMT). Labour is widely expected to notch a big victory, but there are other possible outcomes. Please see our U.K. election primer here for more insights.

U.K. BRC sales remain soft. Same store sales recovered mildly by 0.4% y/y in May vs. 1.2% expected and -4.4% y/y in April. This suggests a small bounce in May retail sales data due out June 21.

Switzerland reported May CPI. Headline remained steady as expected at 1.4% y/y, while core came in a tick lower than expected and remained steady at 1.2% y/y. At the last meeting March, the SNB started the easing cycle with a 25 bp cut to 1.5%. Next meeting is June 20, and the market is pricing in around 55% odds of another rate cut then. We believe the SNB has scope to ease then as inflation remains well within the bank’s price stability range of 0-2%.

South Africa reported weak Q1 GDP data. GDP contracted -0.1% q/q vs. 0.1% expected and a revised 0.3% (was 0.1%) in Q4, while the y/y rate came in at 0.5% vs. 0.8% expected and a revised 1.4% (was 1.2%) in Q4. With growth sluggish and unemployment staggeringly high, it’s no surprise that the ANC was punished at the polls and its vote share plunged to 40.2% vs. 57.5% in 2019. It will now have to enter into a coalition government for the first time since the end of apartheid. The best outcome for the markets would be a coalition with the Democratic Alliance, which espouses more market-friendly policies than the Economic Freedom Fighters or Zuma’s MKP. Coalition talks remain ongoing, but a government must be sworn in by June 17.


Japan officials sound confident about FX intervention. Finance Minister Suzuki said “We intervened in the market to counter excessive FX moves, which were driven by speculation. From that standpoint, we believe that it had a certain effect.” We agree. While the yen remains relatively week, gone are the one-sided moves that we saw in April that brought on the intervention. If nothing else, that should be considered a success. Suzuki added that “The government will continue to closely monitor developments in the foreign exchange market and take all possible measures.”

Reports suggest the BOJ may discuss reducing its bond purchases as early as next week’s meeting. Policymakers will reportedly discuss the appropriate timing to slow its bond buying from around JPY6 trln ($38.4 bln) per month currently, and whether the BOJ needs to provide more details to improve predictability. Policymakers reportedly want to stress that any changes will be gradual and in stages with round numbers but didn’t indicate any specific amounts. That the BOJ is discussing this matter even as JGB yields move higher is a testament to its desire to continue normalizing policy.

Australia data points to soft Q1 GDP growth. Net exports subtracted -0.9 ppt from Q1 GDP growth vs. -0.7 expected and 0.6% added in Q4. This was the first negative reading since Q3 and the largest since Q1 2022 and comes within the context of a current account deficit of -AUD4.9 bln in Q1 vs. an expected surplus of AUD5.2 bln and a revised surplus of AUD2.7 bln (was AUD11.8 bln) in Q4. In addition, inventories rose 1.3% q/q vs. 0.7% expected and a revised -1.6% (-1.7%) in Q4. Q1 GDP data will be published tomorrow, and we see downside risks to the consensus 0.2% q/q.

Early returns suggest the ruling BJP may lose its single party majority in India. However, its coalition is expected to maintain a slim majority in parliament. This contrasts with exit polls over the weekend suggesting a big win for the BJP. Indian stocks are down nearly -6% on the day while the rupee has weakened sharply. For the third time over the past week, markets have been given a brutal reminder of political risks in EM.

Korea reported May CPI. Headline came in a tick lower than expected at 2.7% y/y vs. 2.9% in April, while core fell a tick as expected to 2.2% y/y. Headline was the lowest since July 2023 but still well above the 2% target. At the last meeting May 23, the central bank kept rates steady at 3.5%. It raised its 2024 growth forecast to 2.5% vs. 2.1% previously but maintained its inflation forecast at 2.6%. Governor Rhee noted that “We thought the big change in the growth forecast would have a huge impact on inflation, but it wasn’t big enough to change the inflation outlook. That’s big news for us.” Rhee added that “Uncertainties over the timing of a rate cut have grown. If there is confidence that inflation stabilizes, the task of normalizing the rate level would need to be started.” The swaps market still sees steady rates over the next six months, followed by the start of an easing cycle over the subsequent six months. Next meeting is July 11, and no change is expected then.


Oil prices continue to sink after OPEC+ signaled an earlier than expected end to its output cuts. Brent oil is down nearly 17% from its mid-April peak and is trading at the lowest level since early February near $76.85. The December cycle low near $72.30 is the next big target. And it’s not just oil, as other key commodities such as iron ore and copper are also sliding as optimism about China evaporates. If sustained, the drop in commodity prices is good news for global inflation but bad news for the major exporters.

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