US
Risk appetite continues to ride the wave of yesterday’s Iran deal optimism. USD has retraced all its war-related gains while crude oil prices continue to trade heavy.
USD undershoot looks stretched in the near-term for two reasons. First, stabilizing US labor market conditions will keep odds of Fed funds rate hike in play. In the three months to April, ADP private payrolls increased by an average of 79k each month.
That pace of growth is well within the breakeven range that is necessary to keep the unemployment rate steady given the slowdown in overall labor force growth. A recent Fed research note estimates the breakeven pace of employment growth to average 18k in 2026, substantially lower than at any point in the past 65 years.
Second, foreign demand for US long-term securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds) remains strong. In the twelve months to February, foreign investors accumulated $1615bn of long-term US securities. While down from the record high of $1656bn in January, the amount still dwarfs the -$776bn accumulated US trade deficit over the same period.
Bottom line: we continue to expect the dollar index (DXY) to remain anchored within a 96.00-100.00 range in the next few months. Structurally, we are still bearish USD because of fading confidence in US trade and security policy, worsening US fiscal credibility, and the ongoing politicization of the Fed.
Q1 non-farm productivity report is up next (1:30pm London, 8:30am New York). Productivity (GDP/hours worked) is expected at 0.6% SAAR vs. 1.8% in Q4 and continue to grow around its post-war average of 2.1% y/y. At that annual pace of growth, productivity is a disinflationary force given that it absorbs part of the 3.4% y/y gains in wages.
April New York Fed consumer expectations survey is due later today (4:00pm London, 11:00am New York). Long-term inflation expectations are critical to watch as any drift higher would push the FOMC towards a more hawkish bias.
We also hear today from two of the three regional Fed presidents who did not support the inclusion of an easing bias in the April 29 Fed press release: Beth Hammack and Neel Kashkari.
SWEDEN
USD/SEK is down on broad USD weakness. A was widely expected, the Riksbank kept the policy rate at 1.75% for a fifth consecutive meeting. The bank also leaned against market pricing for rate hikes emphasizing “there is scope to wait until there is a clearer picture of the effects of the war and the supply shocks it entails.”
The March Monetary Policy Report showed the Riksbank pencils in the policy rate at 1.75% until Q4 2026, followed by a 25bps hike to 2.00% by Q1 2028. The swaps curve is more aggressive and price in 63bps of rate hikes to between 2.25% and 2.50% in the next two years. Ample spare capacity in the Sweden economy argues for a shallower tightening path than priced, which is a headwind for SEK.
NORWAY
NOK is outperforming. The Norges Bank surprised most market participants and delivered a 25bps rate hike to 4.25% because “Inflation is too high and has run above target for several years.” Ahead of the decision, the swaps market priced in 54% probability of a hike. Meanwhile, only 5 of the 17 analysts polled by Bloomberg had a rate increase penciled-in, the rest expected the bank to stand pat.
The Norges Bank signaled more tightening in the pipeline as it flagged in March. The policy rate forecast presented in March indicated an increase in the policy rate to between 4.25% and 4.50% by the end of the year. Bottom line: Fed/Norges Bank policy divergence and firm crude oil prices underpin the USD/NOK downtrend.
UK
GBP/USD has rallied above pre-war levels. Today’s local and Scottish elections will test British Prime Minister Keir Starmer’s leadership. Starmer’s Labour Party is poised to get trounced when results start coming in early Friday morning. Check out Politico’s election primer for more details.
A strong showing from the Green party risks pulling the Labour government further to the left, raising concerns about UK fiscal credibility. Alarmingly, UK nominal GDP growth is tracking below 10-year gilt yields, making stopping debt growth very difficult which is drag on GBP.
MALAYSIA
USD/MYR has retraced all its war-driven gains. As was widely expected, Bank Negara Malaysia (BNM) left the policy rate on hold at 2.75% for a fifth consecutive meeting. BNM also maintained its neutral bias, highlighting it “considers the monetary policy stance to be appropriate and consistent with the outlook of continued price stability and sustainable economic growth.” Bottom line: provided the worst of the energy shock is behind us, Malaysia’s positive real rates underpin a firmer MYR.
CZECH REPUBLIC
USD/CZK is trading heavy, eyeing key support at 20.5000. The Czech Central Bank (CNB) is widely expected to keep the policy rate at 3.50% for an eighth consecutive meeting (1:30pm London, 8:30am New York). Board members generally agree that interest rates are at the right level and it would be premature to consider raising them in response to the conflict.
MEXICO
Mexico’s central bank (Banxico) is widely expected to deliver a back-to-back 25bps rate cut to 6.50% (8:00pm London, 3:00pm New York). The risk is Banxico signals a high bar to ease further as the real policy rate (3.2%) is within bank’s neutral range estimate [1.8% to 3.6%, with a midpoint of 2.7%]. The swaps curve price in one final 25bps cut this week, followed by total of 50bps of hikes over the next twelve months which offers MXN support.
