Dollar Steady in Another Quiet Start to the Week

May 20, 2024

Win Thin

Despite some softness in recent data, Fed officials remain very cautious about easing prematurely; financial conditions continue to loosen
The recovery in the U.K. housing market is stalling; the start of the BOE easing cycle remains a toss-up
Japan yields continue to rise; Taiwan reported firm April export orders

The dollar continues to move sideways as the new week begins. DXY is trading flat for the second straight day near 104.478. However, the clean break below 104.887 sets up a test of the April low near 103.880. The euro is trading flat near $1.0870 while sterling is trading flat near $1.27. USD/JPY is trading flat near 155.70 even as JGB yields continue to edge higher (see below). Markets did not react to news that Iran President Raisi died in a weekend helicopter crash. Despite last week’s data, we believe the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. As such, we look for the dollar to eventually recover. Indeed, most Fed officials continue to signal that rate cuts are not imminent.

AMERICAS

Despite some softness in recent data data, Fed officials remain very cautious about easing prematurely. The Fed is speaking with a unified voice and signaling that it is not yet confident that inflation is falling towards the 2% target. Bostic (thrice), Barr, Waller, Jefferson, and Mester speak today. The market sees 10% odds of a cut in June, rising to 30% in July and 80% in September. While these odds rose modestly after last week’s data, it’s clear that the market remains unconvinced that the Fed will pivot earlier than previously anticipated.

Financial conditions continue to loosen. They have loosened four straight weeks through May 10 and are the loosest since mid-January 2022. This simply does not square with Fed comments that policy is restrictive and helps explain why the U.S. economy remains so resilient. With equities higher and yields lower last week, we expect to get another week of loosening when the data are reported Wednesday.

EUROPE/MIDDLE EAST/AFRICA

The recovery in the U.K. housing market is stalling. Rightmove national asking prices rose 0.8% m/m in May vs. 1.1% in April, while the y/y rate slowed to 0.6% vs. 1.7% in April. Encouragingly, the rise in net mortgage approvals to the highest since September 2022 points to firmer house prices ahead.

The start of the Bank of England’s easing cycle remains a toss-up. Odds of a June cut are around 60% but becomes fully priced in for August. This week’s April CPI data will be very important, though we get the May CPI report right before the June 20 decision.

ASIA

Japan yields continue to rise. The 10-year JGB traded as high as 0.975% today, the highest since 2013 and approaching the BOJ’s soft target of 1.0%. The narrower US-Japan 10-year spread is a near-term headwind for USD/JPY. Nonetheless, the bar for an aggressive BOJ tightening cycle is high because underlying inflation in Japan is in a firm downtrend and nearing the BOJ’s 2% target. April CPI print will be released Friday.

Taiwan reported firm April export orders. Orders came in at 10.8% y/y vs. 6.1% expected and 1.2% in March. This was the strongest reading since March 2022, but was flattered by low base effects. Orders from the U.S. and China are leading the way, while Europe and Japan are lagging.

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