Dollar Steadies in Quiet Start to the Week

May 06, 2024

Win Thin

The market is likely to test the dollar’s downside this week; Q2 growth remains robust; Fed releases its SLOOS for Q1; Brazil reports March consolidated budget data
The ECB continues to signal a June cut; eurozone reported firm final April services and composite PMIs; Sweden reported weak April services and composite PMIs
The OECD warned that the RBNZ has limited scope to cut rates this year; Caixin reported April services and composite PMIs

The dollar is getting limited traction in a quiet start to the week. Both Japan and the U.K. were on holiday today so tomorrow may bring more fireworks. DXY is trading slightly near 105.088 after trading as high as 106.490 ahead of last Wednesday’s FOMC decision. Break below 104.887 would set up a test of the April low near 103.880. The euro is trading flat near $1.0770 while sterling is trading higher near $1.2575. USD/JPY is trading higher near 153.75 as the impact of last week’s interventions fade. We believe the backdrop of persistent inflation and robust growth in the U.S. remains in place, but the next round of major data won’t come until next week. As a result, last week’s combination of softer data and a dovish Fed (see below) should weigh on the dollar near-term.

AMERICAS

The market is likely to test the dollar’s downside this week. This seems natural after we got a double whammy last week of softer U.S. data and a dovish Fed hold. While one month does not a trend make, this most recent round of data could signal the start of a slower phase for the U.S. economy. Unfortunately, there are no major data releases this week for markets to chew on. Instead, we have to wait until next week to get key April CPI, PPI, and retail sales data as well as some May regional Fed surveys.

There are many Fed speakers this week. It remains to be seen whether most Fed officials are on board with Chair Powell or not. However, after last week’s dovish performance by Powell, there is really nothing that the hawks can say to erase that message. As always, it will come down to the data. That said, Fed easing expectations have already adjusted. Odds of a June cut remain steady at around 10%, but July odds have risen to 40% vs. 25% ahead of the decision, while September odds have risen to nearly 95% vs. 55% ahead of the decision.

Yet Q2 growth remains robust. This strong momentum is not too surprising after private domestic demand came in at 3.1% SAAR in Q1, suggesting underlying demand remains strong. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 3.3% SAAR and will be updated Wednesday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking 2.2% SAAR and will be updated Friday. Its initial read for Q3 growth will be released in early June.

Fed releases its Senior Loan Officer Opinion Survey. The results will offer an overview of bank lending practices over Q1. We don’t expect any major surprises. The March FOMC meeting minutes pointed out that credit continued to be available to most businesses, households, and municipalities. Even beleaguered commercial real estate (CRE) borrowers continued to find credit readily accessible while CRE loans at banks picked up moderately in January and February. Of note, SLOOS respondents compare lending standards vs. the previous quarter. While credit standards for loans to large and medium firms still tightened in Q4, the number of banks reporting tighter standards fell to 14.5% vs. 33.9% in Q3.

Brazil reports March consolidated budget data. A primary deficit of -BRL1.9 bln is expected vs. -BRL48.7 bln in February, while a nominal deficit of -BRL65.1 bln is expected vs. -BRL113.9 bln in February. Loose fiscal policy has been an ongoing concern for the central bank, limiting its scope to ease more aggressively. Indeed, the swaps market is pricing in a terminal rate between 10.00- 10.25% over the next three months. COPOM meets Wednesday and is expected to cut rates 25 bp to 10.50%. However, nearly a quarter of the analysts polled by Bloomberg look for a larger 50 bp move.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank continues to signal a June cut. In a weekend interview, Chief Economist Lane said “Both the April flash estimate for euro area inflation and the Q1 GDP number that came out improve my confidence that inflation should return to target in a timely manner. So, as of today, my personal confidence level has improved compared with our April meeting. But of course, more data will arrive between now and June.” Of note, the market is currently pricing in three cuts this year, coming in June, September, and December. Simkus, Vujcic, Muller, Vasle, Villeroy, Nagel, and Panetta all speak today.

Eurozone reported firm final April services and composite PMIs. Headline services came in at 53.3 vs. 52.9 preliminary, which dragged the composite up to 51.7 vs. 51.4 preliminary. Looking at the country breakdown, the German composite rose a tick from the preliminary to 50.6, while the French composite came in at 50.5 vs. 49.9 preliminary. Italy and Spain reported for the first time and their composite PMIs came in at 52.6 and 55.7, respectively. Eurozone March PPI was reported and came in a tick lower than expected at -7.8% y/y vs. a revised -8.5% (was -8.3%) in February.

Sweden reported weak April services and composite PMIs. Services came in at 48.1 vs. 53.8 expected and a revised 54.1 (was 53.9) in March, which dragged the composite down to 49.0 vs. a revised 53.0 (was 52.8) in March. This composite reading was the lowest since November. Despite weakness in the recent data, markets still only see 60% odds of a cut this Wednesday. However, a cut becomes fully priced in for June 27.

ASIA

The OECD warned that the Reserve Bank of New Zealand has limited scope to cut rates this year. In its Economic Surveys: New Zealand 2024 report, the OECD wrote “Inflation is likely to be persistent,” stressing that this “limits the scope for lowering the Official Cash Rate in 2024 and it should remain constant at 5.5% until there is clear evidence that inflation will fall to the middle of the RBNZ’s target range.” The OECD added that the government needs to limit spending in order to help the RBNZ lower inflation. The market sees 90% odds of a cut in October, with similar odds of a second cut in November.

Caixin reported April services and composite PMIs. Services came in as expected at 52.5 vs. 52.7 in March, but the composite still rose a tick to 52.8 as manufacturing reported last week rose three ticks to 51.4. There is a slight divergence with the official composite PMI, which came in much weaker than expected a 51.7 vs. 52.7 in March.

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