Dollar Taking a Hit

April 04, 2024

Dollar Taking a Hit

  • The US March Challenger job cuts and weekly jobless claims will offer additional labour market insights ahead of tomorrow’s non-farm payrolls report.
  • Cooler inflation in Switzerland opens the door for a more aggressive SNB easing cycle. CHF is underperforming across the board.
  • The ECB March meeting Account will likely show broad agreement to cut rates in June.
  • Poland’s central bank is widely expected to keep the policy rate at 5.75%.

USD is under downside pressure mostly against the commodity sensitive currencies. NOK, SEK, AUD, and NZD are the top performing major currencies versus USD this week. China’s modest cyclical recovery and improving global manufacturing sector growth momentum (the global manufacturing PMI rose to a 20-month high at 50.6 in March) bode well for the commodity complex. Meanwhile, USD is relatively firm against low yielding currencies (JPY and CHF) underpinned by high US Treasury yields.

Slower US service sector growth momentum in March has kept odds of a June Fed funds rate cut well in play (over 60% priced-in) and curtailed broad USD strength. The headline ISM services index unexpectedly fell to a three-month low at 51.4 in March (consensus: 52.8) from 52.6 in February.

Nonetheless, the US economy remains as good as it gets. Both the manufacturing and service sectors are expanding, and the labour market is resilient. Moreover, financial conditions continue to loosen. The Chicago Fed financial conditions index is the loosest since January 2022. Bottom line: we doubt the Fed will ease as aggressively as implied by interest rate future futures (70bps of cuts in 2024).

Today, the March Challenger job cuts (12:30pm London) and weekly jobless claims (1:30pm London) will offer additional labour market insights ahead of tomorrow’s policy-relevant non-farm payrolls report. Yesterday’s bigger than expected increase in ADP private sector jobs points to upside risk to the March non-farm payrolls print (consensus: +213k).

Fed Chair Jay Powell stuck to the script in yesterday’s speech. Powell reiterated it was “appropriate to begin lowering the policy rate at some point this year” but there is no rush to pull the trigger “given the strength of the economy and progress on inflation so far”.

There are plenty more Fed speakers today: Philadelphia Fed President Patrick Harker (non-voter) participates in a fireside chat about second chance employment (3:00pm London). Richmond Fed President Thomas Barkin delivers a speech on the economic outlook (5:15pm London). Chicago Fed President Austan Goolsbee (non-voter) takes part in a moderated Q&A (5:45pm London). Goolsbee is one of nine who voted for 3 cuts in 2024. Cleveland Fed President Loretta Mester (voter) speaks on the economic outlook (7:00pm London). Mester sees 3 rate cuts in 2024 as reasonable expectation. Minneapolis Fed President Neel Kashkari (non-voter) talks on the economy and other wide-ranging topics (7:00pm London).

CHF underperformed across the board as cooler inflation in Switzerland opens the door for a more aggressive SNB easing cycle. Annual headline CPI inflation unexpectedly slowed to 1% in March (consensus: 1.3%). This is the lowest rate of inflation since September 2021 and below the SNB’s Q1 projection of 1.2%. Moreover, core CPI inflation dropped to more than a two-year low at 1% y/y (consensus: 1.2%). Money market price-in a little over 50bps of SNB cuts over the next 12 months.

EUR/USD is above its 200-day moving average near 1.0844 and GBP/USD is higher around 1.2654 on USD weakness. The ECB March meeting Account (12:30pm London) will likely show broad agreement to cut rates in June (85% priced-in) and limit EUR relief rallies. Recall, the ECB kept policy interest rates steady in March but slashed near-term inflation and GDP growth forecasts paving the way for looser policy settings. Ahead of the Account, the final March Eurozone PMIs (9:00am London) and February PPI (10:00am London) will be reported.

The UK’s data highlights are the final March UK PMIs and BOE March DMP survey (both at 9:30am London). 1-year expectations are expected to fall a tick to 3.2%. The BOE will likely pay particular attention to the expectations for future UK wage growth to gain confidence that a sustained slowdown in average regular earnings growth is underway.

SEK is holding on to recent gains. The Riksbank Minutes of the March policy meeting will offer more details behind the bank’s dovish hold (8:30am London). Recall, the Riksbank left the policy rate at 4.00% and indicated the policy rate can be cut in May or June. The Riksbank also slashed its policy rate forecast in line with money market pricing but cautioned that monetary policy should be “adjusted cautiously going forward, in the form of gradual cuts in the policy rate”.

PLN is firm ahead of the National Bank of Poland (NBP) policy rate decision (no set time but usually between 1:00 and 3:00pm London). NBP is widely expected to keep the policy rate at 5.75% and reiterate its neutral guidance that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term” . Indeed, NBP policymakers Iwona Duda noted “I don’t see room for interest rate cuts this year” while Gabriela Maslowska said “I think it will be possible to think about rate cuts in the second half of next year or early 2026”.

Interest rate futures imply just 25bps of NBP rate cuts over the next 12 months. The risk in our view is NBP delivers more easing than is currently priced-in which is a headwind for PLN. Inflation is near the middle of the central bank’s 1.5-3.5% target range and domestic demand activity weak. Nevertheless, escalating tension between the government and the central bank governor complicates the policy rate path projection.

AUD and NZD are outperforming most major currencies. In Australia, the number of dwellings approved unexpectedly declined 1.9% m/m in February (consensus: +3%) driven by a fall in the number of approved large apartment projects. This follows a downwardly revised 2.5% drop in January. The downtrend in building approvals will further constrain the supply of new dwellings and push house prices higher. In New Zealand, the number of new dwellings consented rose 14.9% m/m in February, after falling 8.6% in January. Regardless, high mortgage interest rates and high construction costs suggest residential investment will remain a drag to NZ growth.

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