USD Powers Forward

March 22, 2024

USD Powers Forward

  • USD is up against all major currencies (except JPY). Fed Chair Jay Powell speaks today.
  • CNH plunged on signs the PBoC may be willing to tolerate a weaker yuan.
  • Threat of FX intervention is offering JPY support.

USD is powering forward against all major currencies (except JPY). We maintain our long-standing view that USD can edge higher because we don’t expect the Fed will deliver 75bps of rate cuts this year. The US economic growth outlook is encouraging, and financial market conditions are easy. Indeed, the US composite PMI dipped to a two-month low at 52.2 in March but remains at levels consistent with a solid improvement in business activity. Meanwhile, the Chicago Fed financial conditions index is the loosest since January 2022.

Moreover, other major central banks surprised on the dovish side this week which is weighing on their respective currencies: RBA dovish hold (scrapped the tightening bias), BOJ dovish hike (no indication that an aggressive tightening cycle is underway), SNB dovish cut (inflation projections imply more cuts in the pipeline), BOE dovish hold (dovish shift in the vote split).

There are no policy-relevant US economic data releases today, only a few key Fed speakers. First up, Fed Chair Jay Powell will deliver opening remarks at a Fed Listens event with a discussion moderated by Vice Chair Philip Jefferson and Governor Michelle Bowman (1:00pm London). Later, Vice Chair for Supervision Michael Barr participates at event on International Economic and Monetary Design (4:15pm London). Finally, Atlanta Fed President Raphael Bostic (2024 voter) participates in a moderated conversation about household finance (8:00pm London).

USD/CNH rallied by 0.65% to a high around 7.2656 (highest since November 2023) on signs the PBoC may be willing to tolerate a weaker yuan. The PBoC raised the daily reference rate for USD against onshore yuan (CNY) to 7.1000 from 7.0942 the previous day. As a background, USD/CNY is allowed to trade within a +/-2% of the fixing. After the daily fixing, USD/CNY broke above key resistance at 7.2000 (a level it had failed to breach this year) and dragged USD/CNH (offshore yuan) higher along with it. The USD/CNH-USD/CNY spread widened to 400pips, the most since August 2023, suggesting risks are skewed towards further downside in CNH.

AUD/USD was pulled lower overnight by the decline in CNH (see comments above). The RBA Financial Stability Review noted again that the Australian financial system is proving resilient. First, nearly all household borrowers are expected to be able to continue servicing their debts even if budget pressures remain elevated for an extended period. Second, strong financial positions limit the risk of widespread financial stress in the business sector. Third, there little evidence of financial stress among owners of Australian commercial real estate (CRE). Finally, high capital levels mean banks are well placed to absorb losses on their loan portfolios.

USD/JPY is consolidating around 151.60 and struggling to break above its November 2023 high of 151.91. The threat of FX intervention is offering JPY support. Japan’s Finance Minister Shunichi Suzuki warned again he’s “watching forex moves with a high sense of urgency”.

Japan’s February CPI print suggests the bar for an aggressive BOJ tightening cycle remains high. In February, annual headline CPI inflation rose a little less than expected to 2.8% (consensus: 2.9%) from 2.2% in January while core (ex-fresh food) inflation matched expectations quickening to 2.8% from 2% the previous month. The February rise in inflation is the result of base effect and is not an indication of a sustained reacceleration in prices. Additionally, underlying inflation pressures remain in a firm downtrend as annual core CPI (ex-fresh food & energy) inflation slowed more than expected to a one year low at 3.2% in February (consensus: 3.3%). Bottom line: we think it’s only a matter of time before USD/JPY makes new cyclical highs.

GBP remains under downside pressure versus USD and EUR. The better-than-expected UK retail sales report was not enough to reduce money market pricing of a BOE rate cut before August. Retail sales volumes were unexpectedly flat in February (consensus: -0.4% m/m) after rising 3.6% m/m in January (revised from a 3.4% increase). Excluding automotive fuel, retail sales volumes rose 0.2% m/m in February (consensus: -0.1%).

EUR/USD broke below its 200-day moving average (1.0839). The German IFO business expectations index is projected to improve to 84.7 in March from 84.1 in February (9:00am London) but that won’t be enough to curtail the downtrend in EUR/USD.

USD/CAD is up on broad USD strength. Canada’s January retail sales print is the domestic highlight (12:30pm London). Statistics Canada advanced retail indicator suggests sales decreased 0.4% in January following a 0.9% increase the previous month. This would raise odds of a June BOC policy rate cut and further undermine CAD.

USD/MXN is up on broad USD strength. Mexico’s central bank cut the policy rate by 25bps to 11.00% (widely anticipated). This was the first cut since 2021 and the vote was 4-1, suggesting the easing cycle should continue without much resistance. The swaps market is pricing in 50bps of easing over the next 6 months followed by another 125bps over the subsequent 6 months.

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