Greenback Gains Ground

May 24, 2024

Elias Haddad

Greenback Gains Ground

Growth momentum has shifted back in favour of the US.

Japan’s April CPI print suggests the bar for an aggressive BOJ tightening cycle is high.

UK retail sales slump in April on weather woes.

USD is up and on track to resume its year-to-date uptrend as growth momentum has shifted back in favour of the US. The US composite PMI surged to a 25-month high at 54.4 largely driven by stronger services sector activity. For comparison, the Eurozone composite PMI increased to a 12-month high at 52.3 on a stabilisation in manufacturing activity, the UK’s fell to a 2-month low at 52.8 on slower services sector growth traction, and Japan’s rose to a 9-month high at 52.4 on an expansion in manufacturing activity.

The US April durable goods orders report (1:30pm London) and the May Kansas City Fed services activity index (4:00pm London) are up next. Core capital goods orders, a proxy for equipment investment, is expected to rise 0.1% m/m after falling 0.2% in March.

Later today, Fed Governor Christopher Waller gives a keynote address on R* - the neutral rate - (2:20pm London). Many Fed officials have commented on their uncertainty about the degree of monetary restrictiveness in part because the longer-run equilibrium interest rates (R*) may be higher than previously thought.

Recall that in the March Dot Plots, the median for the long-term rate (a proxy for R*) rose to 2.562% vs. 2.5% previously. The range of views was wide: 1 Fed official saw R* at 2.375%, 8 saw 2.5%, 1 saw 2.625%, 1 saw 2.75%, 3 saw 3.0%, 1 saw 3.125%, 2 saw 3.5%, and 1 saw 3.75%. It will be interesting to see where Waller fits on that spectrum.

USD/JPY is firmer above 157.00 and roughly three figures away from its April 29 pre-intervention high of 160.17. Japan’s April CPI print suggests the bar for an aggressive Bank of Japan (BOJ) tightening cycle is high. Headline CPI eased two ticks to 2.5% y/y (consensus: 2.4%) and underlying inflation is in a firm downtrend. In line with consensus, core (ex-fresh food) fell four ticks to 2.2% y/y and core ex-energy dropped five ticks to 2.4% y/y. Nevertheless, narrowing in US-Japan 10-year bond yield spreads is a near-term headwind for USD/JPY.

GBP/USD dipped briefly by just 10pips to lows around 1.2680 following abysmal UK consumer spending activity. In April, UK retail sales volumes plunged 2.3% (consensus: -0.5%) after falling 0.2% in March (revised from 0.0%). Excluding volatile automotive fuels, retail sales dropped 2.0% m/m following a 0.6% decline in March (revised from -0.3%). Poor weather is largely the reason behind the low footfall and perhaps explains the muted GBP reaction. Going forward, we expect UK consumer spending to recover underpinned in part by positive real wage growth. Interest rate futures continue to imply a first full 25bps Bank of England policy rate cut for November.

CAD will take its cue today from Canada’s March retail sales report (1:30pm London). Statistics Canada’s advanced retail indicator suggests sales were unchanged in March while economists surveyed by Bloomberg expect -0.1% following a similar decline in February. Poor retail sales activity will reinforce the case for a Bank of Canada (BOC) June rate cut and further weigh on CAD. Interest rate futures raised odds of a June policy rate cut to 68% from 44% following Tuesday’s soft Canada April CPI print.

NZD continues to power forward versus AUD following the RBNZ hawkish hold earlier this week. RBNZ Assistant Governor Karen Silk reinforced the hawkish message stating the bank is “absolutely” prepared to hike rates if necessary. Meanwhile, there is a bright spot for New Zealand’s sluggish household spending outlook. The ANZ-Roy Morgan consumer confidence index improved to 84.9 in May from 82.1 the previous month, albeit the index remains at historical weak levels.

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