Dollar Steady in Quiet Start to Key Data Week

May 13, 2024

Win Thin

Cautious Fed comments have helped the dollar recover; Q2 growth remains robust; New York Fed April inflation expectations will be reported
Czech Republic reported April CPI; Turkey reported March current account data
BOJ pared back its JGB purchases; RBNZ survey of inflation expectations for Q2 was released; China reported weak April money and new loan data; China announced it would sell its first tranche of Special Central Debt

The dollar remains steady as a crucial data week begins. DXY is trading flat near 105.261 but was up last week for the first time after two straight losing weeks. Whether this rally can continue this week will depend solely on key U.S. that data will be reported. GBP is trading flat near $1.2530, while the euro is trading slightly firmer near $1.0785. USD/JPY is trading flat near 155.85 but continues to face stiff resistance near 156. We believe the backdrop of persistent inflation and robust growth in the U.S. remains in place, which the data this week are expected to underscore. As such, we look for further dollar gains.

AMERICAS

Cautious Fed comments have helped the dollar recover. Virtually all that spoke last week signaled that rate cuts were not imminent and as a result, the market adjusted its Fed easing expectations. Odds of a June cut have fallen to 5% vs. 10% at the start of last week, while July odds have fallen to around 25% vs. 40% at the start of last week. September odds have fallen to 75% vs. nearly 90% at the start of last week, while a November cut remains fully priced in. Mester and Jefferson speak today. We expect the Fed to remain cautious but of course, it will all come down to the data and this week, we get three big readings in PPI, CPI, and retail sales. Stay tuned.

Q2 growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q2 growth at 4.2% 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.

New York Fed April inflation expectations will be reported. Short- and long-term expectations remain stuck well above the fed’s 2% target. Last week, University of Michigan reported 1-year expectations at 3.5% vs. 3.2% in April and 5- to 10-year expectations at 3.1% vs. 3.0% in April.

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reported April CPI. Headline came in at 2.9% y/y vs. 2.4% expected and 2.0% in March. This was the first acceleration since October and moves inflation to the top of the 1-3% target range. At the last meeting May 2, the Czech National Bank cut rates 50 bp to 5.25% and raised its year-end PRIBOR forecast by a full percentage point to 5.0%. Governor Michl warned that it would be very cautious about further cuts and the CPI data bear him out. The swaps market is now pricing in 75-100 bp of total easing over the next 12 months vs. 125 bp previously.

Turkey reported March current account data. The deficit came in at -$4.54 bln vs. -$3.75 bln expected and a revised -$3.64 bln (was -$3.27 bln). What’s noteworthy is that so-called “net errors and omissions” came in at -$9.56 bln, which accounted for nearly all of the -$10.281 bln drop in official reserves. Some are linking it to election-related capital outflows that month but bears watching. If the outflows continue, it would be one signal that monetary policy needs further tightening.

ASIA

Bank of Japan pared back its JGB purchases. It offered to buy JPY425 bln of 5- to 10-year bonds, down from JPY475.5 bln in late April. This is still within the planned range of JPY400-550 bln but the smaller purchase sent JGB yields higher as the 30-year yield rose to the highest since 2011. BOJ tightening expectations remain largely unchanged, with the swaps market pricing in around 50 bp of tightening over the next two years.

RBNZ survey of inflation expectations for Q2 was released. 2-year inflation expectations fell to 2.33% vs. 2.50% in Q4 and continue the decline from the high of 3.62% in Q4 2022. 1-year expectations came in at 2.73% vs. 3.22% in Q4 and are within the 1-3% target range for the first time since Q4 2020, while 2-year expectations have been within the 1-3% target range since Q2 2023. Both give the RBNZ leeway to cut rates this year. The market is pricing in the first cut October 9 and has largely priced in a second cut November 27.

China reported weak April money and new loan data. New loans came in at CNY731 bln vs. CNY940 bln expected and CNY3.089 trln in March, while aggregate financing came in at -CNY199 bln vs. CNY914 bln expected and CNY4.868 trln in March. This was the first drop in aggregate financing since the series began in 2017 and suggests that policymakers have hit a wall in terms of injecting stimulus and so the 5% growth target for this year will be difficult to meet. People’s Bank of China sets its 1-year MLF rate Wednesday and is expected to keep it steady at 2.5%.

China announced it would sell its first tranche of Special Central Debt this Friday. Plans were announced in March to sell a total of CNY1 trln this year, only the fourth of its kind in over 25 years. Reports suggest the sale will begin with 30-year bonds, which at a planned CNY600 bln would make up the lion’s share of the CNY1 trln issuance. That said, we just can’t get excited about greater reliance on debt-fueled growth from a country that’s already under a huge debt overhang equivalent to nearly 300% of GDP.

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