Dollar Soft as New Week Begins

May 15, 2023
  • Fed easing expectations continue to run high; regional Fed surveys for May started rolling out; Canada reports April CPI
  • Eurozone reported soft March IP; Sweden reported soft April CPI data; Turkey will hold a runoff vote for the presidency
  • PBOC kept its key 1-year MLF rate steady at 2.75%, as expected; the final outcome of the Thai elections is not yet known

The dollar is trading soft as the new week begins. DXY is trading lower near 102.50 after two straight up days took it as high as 102.75. We believe it is on track to eventually test of the early April high near 103.058. The euro is trading higher near $1.0875 after finding some support near $1.0850 but remains on track to test the April 10 low near $1.0830. Sterling is trading higher and back above $1.25 after finding some support near $1.2450 but remains on track to test the May 2 low near $1.2435. USD/JPY continues to move higher and is trading above 136 for the first time since May 3. We look for continued gains and a clean break above 136.15 is needed to set up a test of the May 2 high near 137.75. Banking sector concerns and dovish market pricing for Fed policy have been the two major negative headwinds on the dollar. While regional bank stocks remain under pressure, the data suggest low risks of systemic problems and so we believe the dollar has likely put in a near-term bottom. However, we need significant repricing of Fed policy in order to see another big leg higher for the greenback.


Fed easing expectations continue to run high. At the start of last week, the swaps market was pricing in a Fed Funds range between 4.0-4.25% in 12 months. Now, it's seen around 3.75% in 12 months with three cuts still priced in by year-end. Fed officials are likely to continue pushing back against this dovish take. We have a full slate of Fed speakers. Actually, we can’t recall a week that had so many scheduled. Bostic, Kashkari, and Cook speak today. Bostic said “My baseline case is we won’t really be thinking about cutting until well into 2024. If you look at most measures of inflation, they’re still two times where our target is. And so that’s a long distance still to go.”

Regional Fed surveys for May started rolling out. Empire manufacturing survey kicked things off today and came in at -31.8 vs. -3.9 expected and 10.8 in April. New York Fed services index will be reported tomorrow. April IP will also be reported tomorrow and is expected flat m/m vs. 0.4% in March. Philly Fed business outlook will be reported Thursday and is expected at -20.0 vs. -31.3 in April. The manufacturing is slowing but that is a global phenomenon, as services sector strength is proving to underpin growth all around the world.


Eurozone reported soft March IP. It came in at -4.1% m/m vs. -2.8% expected and 1.5% in February, while the y/y rate came in at -1.4% vs. 0.1% expected and 2.0% in February. This resumes the y/y contraction after two months of modest growth.

ECB expectations have steadied. WIRP suggests a 25 bp hike is priced in for June 15 and about 60% for July 27. One last 25 bp hike is priced in for September 14 and so the market so far does not believe the hawks that are pushing for three straight hikes. 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. Of note, the European Commission revised up its forecasts for eurozone inflation to 5.8% this year and 2.8% next year vs. 5.6% and 2.5% previously.

Sweden reported soft April CPI data. Headline came in a ticker lower than expected at 10.5% y/y, CPIF came in four ticks lower than expected at 7.6% y/y, and CPIF ex-energy came in three ticks lower than expected at 8.4% y/y. At the last policy meeting April 26, the Riksbank hiked rates 50 bp to 3.5% but there were two dissents in favor of a smaller 25 bp move. The bank noted that “It is important for confidence in the inflation target that inflation falls clearly this year. To ensure that this happens, the policy rate needs to be raised further.” Forward guidance shifted more hawkish as the policy rate is seen peaking at 3.65% in Q2 2024 vs. 3.33% in Q4 2024 in the February forecasts and staying there through Q2 2025 before falling by Q2 2026. WIRP suggests odds of a 25 bp hike June 29 at nearly 90%. However, if inflation continues to fall, that is likely to be the final hike of this cycle.

Turkey will hold a runoff vote for the presidency. No one won a simple majority yesterday and so the top two candidates will face off again May 28. Incumbent Erdogan won 49.5% of the vote while main opposition leader Kilicdaroglu won 45%, according to the electoral board. Turkish assets have sold off today in disappointment as many had hoped for a clear opposition victory. Now, it appears increasingly likely that Erdogan may cling to power. To say this election is important would be an understatement. Erdogan has driven away a generation of investors with his unorthodox economic policies. He has also been a thorn in NATO’s side by so far vetoing Sweden’s entry. An opposition victory would help start the process whereby Turkey becomes investable and a reliable NATO ally once again but the outcome is by no means assured. Stay tuned.


People’s Bank of China kept its key 1-year MLF rate steady at 2.75%, as expected. While the hard data have been very disappointing, we do not think policymakers will rush to inject more stimulus just yet. April IP and retail sales will be reported tomorrow. IP is expected at 10.8% y/y vs. 3.9% in March while sales are expected at 22.0% y/y vs. 10.6% in March. Don’t be fooled by the steep y/y increases as they are due largely to low base effects as the economy struggled under Covid Zero policies last year. Right now, China is facing deflation risks and weak growth that calls for more stimulus, but recent reports of an exploding debt/GDP ratio warrant some caution.

The final outcome of the Thai elections is not yet known. While we know that the opposition Pheu Thai and Move Forward parties together won a large majority in the 500-seat lower house, we do not know who the 250 military-appointed seats in the Senate will support as the next Prime Minister. Can the Senate really try to nullify the popular vote? Comments from incumbent Prime Minister Prayuth suggest not, as the retired general pledged to abide by the results and added “I respect democracy and elections.” We do not believe the army will try to cling to power as the people have spoken once again. Of note, Move Forward won the most seats and so it seems leader Piti is likely to be the next leader of Thailand. Thailand reported firm Q1 GDP. Growth came in a tick higher expected at 1.9% q/q vs. a revised -1.1% (was -1.5%) in Q4, while the y/y rate came in at 2.7% vs. 2.3% expected and 1.4% in Q4. The incoming government will inherit an economy that’s recovering quite nicely after being hit hard by the pandemic.

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