USD Staging Modest Recovery

May 07, 2024

USD Staging Modest Recovery

  • USD is up and Treasury yields lower on limited US economic data releases.
  • RBA was less hawkish than anticipated. AUD underperforms and Australian bonds outperform.
  • Eurozone March retail sales volumes is up next.

USD has recovered some of last week’s losses and Treasury yields continue to drift lower. There are no policy-relevant US economic data releases this week to trigger sustained moves in USD or Treasury yields.

The Fed’s April Senior Loan Officer Opinion Survey showed lending standards tightened slightly and demand for loans weakened over Q1. The net share of US banks that tightened standards on commercial and industrial loans (C&I) rose from 14.5% to 15.6% over Q1, albeit down from a high of 50.8% in Q3 2023. The US March consumer credit report is today’s data highlight (8:00pm London) and Minneapolis Fed President Neel Kashkari (non-voter) speaks later today.

Overall, the cyclical USD uptrend is intact underpinned by the encouraging US macroeconomic backdrop. But in the short-term, USD will struggle to gain upside traction because growth momentum going into Q2 is shifting from the US towards other major economies.

AUD is underperforming across the board and Australian bonds outperformed as the RBA was less hawkish than anticipated. The RBA left the policy rate at 4.35% (no surprise). There was a risk the RBA would reinstate some form of tightening bias because inflation in Australia is declining more slowly than expected.

Instead, the RBA stuck to its neutral policy guidance that “the Board is not ruling anything in or out” and the RBA updated forecasts were mixed. Australia real GDP growth projections were trimmed for Q2 (-0.1pts to 1.2%) and Q4 (-0.2pts to 1.6%) reflecting a softer near-term outlook for household consumption and dwelling investment.

Meanwhile, the RBA projected Australia headline and trimmed mean inflation rates to be higher through Q2 2025 largely because of sticky services price inflation. However, the RBA still projects inflation to return to the target range of 2 to 3% in the second half of 2025, and to the midpoint in 2026.

RBA Governor Michele Bullock struck a balance tone during her press conference emphasising “we might have to raise, we might not”, adding the board discussed option of raising rates at today’s meeting. In our view, the RBA’s next move is a cut and not a hike because household spending is sluggish. Indeed, Australia retail sales volumes fell more than expected by 0.4% q/q in Q1 vs. consensus of -0.3%. The Australian Bureau of Statistics points out that “the only rise in volumes over the past 18 months was the December quarter last year as extensive discounting from Black Friday sales boosted volumes.”

EUR/USD is lower near 1.0755. Eurozone retail sales volumes are expected to rise 0.7% m/m in March after falling sharply by 0.5% in February. The Eurozone economy has recovered quickly from its downturn as real GDP grew 0.3% q/q over Q1. Nevertheless, the Eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June.

GBP/USD is down around 1.2540. UK BRC total retail sales unexpectedly drops 4.4% y/y in April (consensus: +2.0%) after rising 3.5% y/y in March. The timing of Easter may have affected the data according to the BRC. A bigger driver of GBP will be Thursday’s Bank of England interest rate decision and Monetary Policy Report.

The Bank of England is widely expected to leave the policy rate at 5.25% Thursday. The focus instead will be on the voting split and the updated macroeconomic projections. In March, one MPC member, Swati Dhingra, voted to reduce the policy rate while all others voted to keep rates on hold. The risk is the MPC decision to keep the policy rate steady in May is unanimous which can underpin a firmer GBP. Leading indicators point to a pick-up in UK economic activity and underlying inflation pressures (private sector regular pay growth and services CPI) are tracking higher than the BOE’s March projections.

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