US
The dollar index (DXY) is up near a six-week high. Bond markets have pared recent losses, helped by softer inflation prints in Canada and the UK, alongside solid demand for Japan’s 20-year bonds. Crude oil prices are a little lower. But until there is a clear endgame to the Strait of Hormuz blockade, crude oil prices are likely to remain firm.
After accounting for pipeline redirection and strategic reserve releases, the net loss of oil (crude and product) from the Hormuz blockade is estimated at around 13 million barrels per day. My colleague Priya Sharma points out that global oil stocks totaled 7.9 billion barrels in April, implying more than 600 days before oil inventories are fully depleted.
Nevertheless, markets would likely face severe price stress long before the theoretical crude inventory buffer runs dry. As such, yesterday’s report that NATO is considering deployment to Hormuz if the Strait is not reopened by July, is a reassuring sign.
In our view, DXY looks likely to overshoot the upper end of its nearly one year 96.00-100.00 range largely because resilient US economic activity backs a more restrictive Fed. Watch out today for the FOMC April 28-29 meeting minutes for clues on the hurdle for rate hikes (7:00pm London, 2:00pm New York).
The center of gravity on the FOMC is shifting from an easing to a more neutral bias. Regional Fed presidents Beth M. Hammack, Neel Kashkari, and Lorie K. Logan did not support inclusion of an easing bias in the April 29 statement while Jay Powell argued during the press conference that “a little bit of restriction or the high end of neutral is just the right place to be.”
Philadelphia Fed President Anna Paulson (FOMC voter) echoed that view overnight stressing that “keeping rates steady allows us to assess how the economy is evolving and the risks to both price stability and the labor market.”
Check out our latest note Once Upon a Time at the Fed to see what a Kevin Warsh-led Fed means for markets.
UK
GBP/USD is holding under 1.3400. UK inflation cools more than expected in April, giving the BOE some breathing room. Headline CPI dropped to a 13-month low at 2.8% y/y (consensus: 3.0%, BOE projection: 3.1%) vs. 3.3% in March. Housing and household services (principally electricity and gas) made the largest downward contribution to the headline CPI.
Core inflation fell to 2.5% y/y (consensus: 2.6%), the lowest since July 2021, vs. 3.1% in March, while services CPI plunged to 3.2% y/y (consensus: 3.5%, BOE projection: 3.4%) vs. 4.5% y/y in March.
The swaps curve trimmed BOE rate hike expectation in the next twelve months to 66bps from 75bps. That’s still too aggressive given the BOE estimates a negative output gap between -1.5% and -1.7% of potential GDP in 2026. Bottom line: scope for a downward adjustment to the UK swaps curve alongside domestic political uncertainty, can further undermine GBP.
The Financial Times reported the UK Treasury was considering asking supermarkets to voluntarily cap prices on food in supermarkets in exchange for regulatory relief. Turning to 1970s style price controls misses the root problem. Virtually non-existent UK productivity is the real aliment. Since 2008 global financial crisis, UK labor productivity has grown at an annual rate of 0.4% vs. 1.8% in the US.
EUROZONE
EUR/USD dipped under 1.1600 to near a six-week low. In our view, EUR/USD has room to edge lower towards support at 1.1400, reflecting a stronger US growth outlook relative to the Eurozone.
Hawkish comments from ECB Governing Council member Pierre Wunsch did not offer EUR support. Wunsch signaled that the likelihood of a June hike “is quite high” adding that market bets for 75bps of increases in interest rates this year is “reasonable.”
Markets price in 86% odds of a 25bps ECB rate hike to 2.25% at the June 11 meeting. Rate hikes in a low growth, high inflation environment, is not outright bullish for EUR but should help cushion the downside.
INDONESIA
USD/IDR is down near 17605 after reaching a record high of 17760 yesterday. Bank Indonesia (BI) delivered a surprise jumbo hike today. BI raised the policy rate 50bps to 5.25% (consensus: +25bps) to “strengthen the stabilization of the rupiah.”
Since the onset of the Iran war on February 28, IDR is the fourth worst performing currency versus USD (-4.74%). PHP is the worst (-6.6%), followed by INR (-6.1%) and THB (-5.0%).
Today’s BI hike followed seven straight holds and effectively ended an easing cycle that began in September 2024. BI also warned that it will continue increasing the intensity of foreign exchange interventions to stabilize the rupiah via offshore NDFs, spot, and domestic NDFs. BI FX reserves are ample totaling $127bn in March (equivalent to 6.4 months of imports, double the international adequacy standard).
Bottom line: tighter monetary policy and ongoing FX intervention, while Indonesia’s current account is largely in balance (-0.1% of GDP) should be enough to curtail IDR weakness.
CANADA
USD/CAD is up and nearing important resistance at its 200-day moving average (1.3813). Canada’s softer than expected inflation in April will reassure the Bank of Canda (BOC). Headline CPI rose 2.8% y/y (consensus: 3.1%) vs. 2.4% in March. Higher energy prices, most notably gasoline prices, drove the acceleration in headline CPI.
Excluding food and energy, core CPI dropped to near a five-year low at 1.5% y/y vs. 1.9% in March, while the policy-relevant core CPI (average of trim and median) unexpectedly eased to 2.05% y/y (consensus: 2.25%) vs. 2.25% in March.
Bottom line: underlying inflation is contained near the BOC’s 2% target, leaving market pricing of BOC rate hikes overly aggressive (75bps to 3.00% in the next twelve months). Still, the drag to CAD from a potential downward adjustment to the swaps curve is offset by the positive terms of trade shock to Canada’s economy from firm crude oil prices.
