The Duck Test

April 29, 2024

The Duck Test

  • If it walks, swims, and quacks like a duck, it’s likely a duck. USD/JPY plunges by 5 big figures but no official confirmation of intervention.
  • The encouraging US macroeconomic backdrop continues to support the cyclical USD uptrend.
  • Sweden’s economy unexpectedly contracts in Q1.

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

USD is lower on possible BOJ intervention to curtail the surge in USD/JPY. USD/JPY briefly tested fresh multi-decade highs above 160.00 before backing-off swiftly by 5 big figures near 155.00. There is no confirmation yet, but the price action suggests the BOJ probably stepped in. Japan’s top currency official Masato Kanda declined to comment when asked about the latest FX moves. Regardless, by delivering such a dovish hold last week, the BOJ invited yen weakness and any intervention would be throwing good money after bad.

We are sticking to our view that the cyclical USD uptrend is intact underpinned by the encouraging US macroeconomic backdrop. A hawkish Fed hold Wednesday and Friday’s non-farm payrolls report will likely reinforce the case that the Fed will keep the funds rate high for longer. Please see our Drivers for the Week Ahead for all the details. Today’s April Dallas Fed manufacturing index is unlikely to be a market mover (3:30pm London).

EUR/USD recovered above 1.0700. The Eurozone economic sentiment index is forecast to improve to an 11-month high of 96.7 in April from 96.3 in March (10:00am London). Nonetheless, the Eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June (73% priced-in). Today, Spain and Germany’s EU Harmonized inflation are both forecast to increase a tick to 3.4% y/y and 2.4% y/y, respectively.

SEK largely ignored disappointing economic activity in Sweden. Sweden’s economy unexpectedly shrinks 0.1% in Q1 after rising by just 0.1% the previous quarter. The consensus was for real GDP to rise 0.2%, while the Riksbank had pencilled-in no growth in Q1. Recall, the Riksbank indicated “that the policy rate can be cut in May or June if inflation prospects remain favorable.” The market sees 50% odds of a rate cut next week, while a June cut is fully priced in.

AUD/USD continues to grind higher. Australian interest rate futures went from pricing RBA policy rate cuts to a hike by year-end following last week’s stickier than expected Australia Q1 CPI inflation. Cash rate futures now imply a 50% probability of a 25bps rate increase by December. We doubt the RBA will resume tightening because Australia household spending growth is weak. The March private sector credit and retail sales data will offer a fresh glimpse at the state of household spending activity (tomorrow, 2:30am London). Of note, the recent decline in the Westpac Melbourne Institute Consumer Sentiment Index points to sluggish consumer spending growth.
 

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