USD Rally Gaining Traction

• Fed Governor Waller made it clear there was no rush to begin cutting interest rates.

• The BOJ March policy meeting Summary of Opinions validates the case for a gradual BOJ tightening cycle.

• "Swifties" underpinned Australia retail sales growth in February.

USD is up in line with higher 2-year Treasury yields. Fed Governor Christopher Waller made it crystal clear overnight there was no rush to begin cutting interest rates, triggering a reassessment in near-term Fed funds rate cut expectations. Odds of a June rate cut eased to 68% from 77% before his speech.

According to Waller “the strength of the U.S. economy and resilience of the labor market mean the risk of waiting a little longer to ease policy is small and significantly lower than acting too soon and possibly squandering our progress on inflation”. Waller also noted that the last two months of data suggests that “progress on inflation has slowed and may have stalled”, adding that the February core PCE deflator print (released tomorrow) is expected to remain elevated which “would not represent significant progress toward 2 percent”.

Today’s US economic data releases are unlikely to bring substantial changes to US interest rate expectations: The final Q4 2023 GDP print is expected to confirm the economy grew by 3.2% saar (12:30pm London); The University of Michigan reports its final March reading (2:00pm London); The Chicago PMI is expected at 46.0 in March vs. 44.0 in February (1:45pm London); Finally, the Kansas City Fed manufacturing index is forecast to remain at -4 in March (3:00pm London).

EUR/USD is down near 1.0800 on broad USD strength. The Eurozone February monetary developments (9:00am London) will likely remain consistent with unimpressive economic activity and contained inflation pressures. In January, Eurozone broad monetary growth (M3) remained close to historical lows at only 0.1% y/y. Importantly, the contribution to M3 growth from private sector credit remained muted reflecting the lack of aggregate growth in bank lending.

GBP is down versus USD but firmer against EUR. BOE policymaker Jonathan Haskel warned that interest rate cuts are “a long way off” and noted he favours slower pace of cuts when easing starts. Recall, Haskel switched his vote in March to keeping the bank rate on hold after supporting a rate hike the past several meetings.

The final Q4 2023 UK GDP print confirmed the economy shrank by 0.3% q/q following a fall of 0.1% the previous quarter. Meanwhile, the UK current account deficit widened a little to 3.1% of GDP in Q4 from 2.7% in Q3 2023.

USD/JPY is trading sideways near 151.35 as threat of intervention contains JPY weakness. In our view, it’s only a matter of time before USD/JPY breaks higher because we anticipate a gradual BOJ tightening process. In fact, the BOJ March policy meeting Summary of Opinions noted “the Bank would need to emphasize its cautious stance in the case of terminating the negative interest rate policy, as Japan's economy is not in a state where rapid policy interest rate hikes are necessary”.

Moreover, the BOJ highlighted “it is important to clearly communicate…that the changes in the monetary policy framework…will not be a regime shift toward monetary tightening, but rather a part of efforts to achieve the price stability target.”

Canada’s January GDP report is the domestic highlight (12:30pm London). Canada’s economy is forecast to rise by 0.4% in January. But the modest 0.2% monthly rise in retail sales volumes and flat wholesale sales volumes in January point to downside risk to GDP growth.

AUD/USD is trading heavy just above key technical support at 0.6500. Weak consumer spending activity in Australia raises the risk of a sharper easing cycle than is currently implied by cash rate futures (46bps of cuts over 2024). Australian retail turnover rose 0.3% m/m in February (consensus: +0.4%) following a rise of 1.1% in January and a fall of 2.1% in December.

However, according to the Australian Bureau of Statistics seven sold-out Taylor Swift concerts in Sydney and Melbourne boosted retail spending in February via spending on clothing, merchandise, accessories and dining out. Looking beyond the “Swiftie” one-off effect, underlying spending in Australia is stagnating. Retail turnover ticked-up for a third consecutive month in February by only 0.1% in trend terms. Meanwhile, Australia’s tight labour market condition eased further in February. Job vacancies fell 6.1% in February but remain above pre-pandemic levels.

NZD/USD is breaking lower. Softer New Zealand consumer and business confidence reinforces the case for RBNZ policy rate cuts later this year. The ANZ business expected own activity index fell 7 points to a six-month low at +23 and the ANZ-Roy Morgan consumer confidence index fell 9 points in March to a seven-month low at 86.4.

RBNZ Governor Adrian Orr also fuelled rate cut bets by pointing out “aggregate demand is slowing, core inflation pressures are coming off and inflation expectations are coming back to target, so we hope that we can see low and stable inflation on the horizon again and that would mean more normalized interest rates on the horizon”. New Zealand interest rate futures price-in roughly 75bps of cuts in 2024, starting in August. In contrast, the RBNZ has a first rate cut pencilled-in for Q2 2025.