Our Currency, Your Problem

April 18, 2024

Our Currency, Your Problem

  • Worries over USD strength is building.
  • But as long as US economic activity remains solid and monetary policy divergence persist; the cyclical USD uptrend is intact.
  • Australia’s labour market is still tight, suggesting the RBA is in no rush to loosen policy.

USD is lower across the board and Treasuries rallied. Budding concerns over USD strength may have taken the wind out the dollar’s sail. Finance ministers of Japan and South Korea acknowledged yesterday “serious concerns about the recent sharp depreciation of the Japanese yen and the Korean won”. Earlier this week, Bank Indonesia intervened to stabilize its slumping currency and overnight the People’s Bank of China warned against one-sided moves in the yuan.

Regardless, as long as US economic activity remains solid and monetary policy divergence persist; the cyclical USD uptrend is intact. The April Fed Beige Book continues to point at a healthy US economic backdrop. According to the Beige Book “ten out of twelve Districts experienced either slight or modest economic growth—up from eight in the previous report”. And, “on balance, contacts expected that inflation would hold steady at a slow pace moving forward”.

Meanwhile, Cleveland Fed President Loretta Mester (voter) is the latest Fed official to urge patience before easing. Mester noted that policy is in a good place and “we don't have to be in a hurry”. More Fed officials speak today: Bowman, Williams, Bostic and Collins.

US weekly jobless claims will be closely watched (1:30pm London). That’s because the initial claims reading will be for the BLS survey week containing the 12th of the month. These are expected at 215k vs. 211k last week. Continuing claims are reported with a one-week lag, and these are expected at 1.818 mln vs. 1.817 mln last week. The Philadelphia Fed business outlook survey (1:30pm London) and existing home sales (3:00pm London) are the other data highlights today.

GBP/USD is a little firmer near 1.2480. BOE Governor Andrew Bailey brushed-off the UK’s latest CPI print which showed inflation stickier than expected in March. According to Bailey “next month's inflation number will show quite a strong drop” owing to the reduction in the energy price cap from April. Nonetheless, high UK services inflation and nominal wage growth will keep the BOE cautious. As such, there is scope for UK interest rate expectations to adjust higher in favour of GBP. Tomorrow’s UK March retail sales report is the next data highlight.

EUR/USD recovered towards 1.0690 on USD weakness. The Eurozone’s February current account balance is up next (9:00am London). The current account surplus was at a 2% of GDP in January and should help cushion EUR/USD undershoots beyond fundamental equilibrium. Our adjusted PPP model estimates EUR/USD long-term equilibrium at around 1.1050.

USD/JPY is a little lower near 154.00 on USD weakness. Bank of Japan (BOJ) board member Asahi Noguchi argued his case for gradual rate hikes and vowed to keep policy settings easy. His dovish comments are not surprising as he was one of two BOJ board members who voted against the March rate hike. Japan March CPI is the next focus (00:30am London).

 AUD/USD is tracking iron ore prices and RBA rate expectations higher. Australia’s labour market eased in March but remain tight, suggesting the RBA is in no rush to loosen policy. Employment unexpectedly fell 6.6k (consensus: +10k) following a larger than usual 117.6k increase in February. The decline in jobs was driven by part-time employment (-34.5k). Full-time employment was up 27.9k. The unemployment rate rose a tick to 3.8% (consensus: 3.9%) and remains below the lower-end of the RBA’s estimated full-employment range of 4.0-5.75%. The forward-looking Westpac-Melbourne Institute Unemployment Expectations Index shows that more consumers expect unemployment to fall over the year ahead. Interest rate futures are pricing less than 90% odds of a 25bps RBA rate cut in 2024 versus almost 50bps of total easing earlier this month.

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