Greenback Gains Grounds

June 17, 2024

Greenback Gains Grounds

  • A hawkish Fed, political turmoil in France, and US economic outperformance point to further USD upside.
  • Data-light day ahead. Look-out for comments by ECB official around French market turbulence.
  • China’s property slump worsens in May, weighing on iron ore prices and AUD.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

 

USD is starting the week on a dominant note. A hawkish Fed, political turmoil in France, and US economic outperformance point to further USD upside.

There is room for US interest rate expectations to adjust higher in support of a firmer USD. Fed funds futures continue to price-in about 50bps of cuts by December 2024 while the Fed has only one rate cut penciled-in. Minneapolis Fed President Neel Kashkari (non-voter) said over the weekend “If there is just one rate cut this year, it would likely come toward the end of the year.”

The political turmoil in France ahead of the June 30/July 7 legislative elections has rattled European financial markets and is weighing on EUR. Polls show Marine Le Pen’s far-right National Rally and the left wing New Popular Front are on course to be the two biggest political groups in the French National Assembly. Such a scenario has worsened France’s already poor fiscal outlook as both parties have unfunded spending programs. The 10-year yield premium on French bonds over German bunds widened to a seven-year high, sparking contagion in Eurozone periphery government bonds.

Growth momentum favours the US economy and the cyclical USD uptrend. In May, the US S&P Global composite PMI surged to a 25-month high at 54.4, the Eurozone composite PMI increased to a 12-month high at 52.2, the UK composite PMI fell to 53.0 and Japan’s composite PMI rose to a 9-month high at 52.6. The June PMI prints are reported Friday.

The US June Empire State manufacturing survey is today’s domestic focus (1:30pm London). Also, New York Fed President John Williams moderates a discussion (5:00pm London) and Philadelphia Fed President Patrick Harker (non-voter) speaks on the economic outlook (6:00pm London).

EUR/USD is heavy around 1.0700. Key ECB speakers today include Chief Economist Philip Lane (9:00am London) and President Christine Lagarde (10:00am London). Any comments around French market turbulence will be heavily scrutinize.

Four G10 central banks meet this week. The Reserve Bank of Australia kicks off the show tomorrow followed on Thursday by the Swiss National bank, Norges Bank and Bank of England. Please see our Drivers for the Week Ahead for a detailed preview.

AUD/USD is down near the lower end of its one month 0.6575-0.6700 range on lower iron ore prices. China’s property slump continues to undermine iron ore prices as the property sector accounts for almost 40% of China’s steel consumption. The declines in China property investment and home prices quickened in May.

China reported mixed economic activity in May. Annual industrial production and fixed asset investment growth slowed more than expected to 5.6% (consensus: 6.2%, prior: 6.7%) and 4% (consensus: 4.2%, prior: 4.2%), respectively. In contrast, annual retail sales growth overshot expectations and picked up 3.7% (consensus: 3%, prior: 2.3%). Regardless, sustained consumption-led growth is unlikely in part because of the nation’s huge debt overhang and a burst property bubble.

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