FX Daily: Dollar Should Be Doing Better

ING

Forex

Central Bank

Economic

Summary:

It is a little surprising to see EUR/USD trading above 1.08 despite a strong US jobs report for March. Could investors be waiting for Wednesday’s release of the March US CPI data before taking the dollar on another leg higher?

USD: Fed's speed bump just got bigger

Friday's strong US jobs report has added to the bumpy path of US disinflation and Federal Reserve rate cuts. At the start of this year, the Fed was comfortably talking about strong disinflationary trends and the slowing labour market. Now it has seen the three-month moving average for US jobs growth rise four months in a row, lending support to those in the 'no landing' camp.

Despite Friday's 10bp rise in two-year US swap rates, dollar gains have proved relatively modest. Perhaps investors are recalling Fed Chair Jerome Powell's answer to a question at the 20 March FOMC press conference, where he said that strong US jobs data would not delay rate cuts. More likely, however, is that investors are awaiting this Wednesday's release of March CPI data, where another high 0.3% month-on-month reading in core CPI data will further thwart the kind of benign conditions required for easing policy.

Currently, the market prices just 62bp of Fed easing this year, and a terminal rate for this easing cycle at 3.65%. The risks are clearly skewed to the market just pricing 50bp of Fed easing this year, pointing to the dollar staying stronger for longer.

Touching on a theme we introduced last week, at a stretch one could question whether the dollar's failure to advance has something to do with de-dollarisation trends. We note that gold is still pushing ahead strongly, and recent data shows that the People's Bank of China has been a consistent buyer of gold.

There have been no great signals of China slashing its holdings of US Treasury securities (unlike Russia in 2018), and total foreign central bank holdings of US Treasury securities are pretty steady at around $3.8tr. Yet this is a trend worth watching, especially given large US Treasury auctions this week, where $199bn of three, ten and thirty-year Treasuries are on offer. The auctions are held Tuesday through Thursday.

For today, we suspect that DXY will stay bid following Friday's jobs report – but this week's big FX moves will come on Wednesday.

EUR: Why is EUR/USD still above 1.08?

It is quite surprising to see EUR/USD trading above 1.08. US rates markets have reacted to the jobs data, but FX markets have not. However, given that two-year EUR:USD swap differentials are now 150bp in the dollar's favour, the pressure for sub 1.08 levels is clearly building.

Looking ahead this week, the highlight of the eurozone's data calendar will be Thursday's European Central Bank (ECB) meeting. The ECB is in the much more fortunate position of having a much clearer disinflationary backdrop with which to support an easing cycle.

We suspect that EUR/USD will drift lower into Wednesday's US CPI data and do not see too much eurozone data of note this week.

Elsewhere, the market is keen on a weaker Swiss franc at the moment and will be keen to see what Swiss National Bank President Thomas Jordan has to say in a rare speech at 5:15pm CET today. The market now prices 22bp of SNB easing at the June meeting. If, however, the ECB turns more dovish than the SNB – and given the importance of rate spreads to driving the EUR/CHF rally – the next leg higher to 1.00 in EUR/CHF may be much harder work.

GBP: Sterling volatility remains exceptionally low

EUR/GBP volatility remains exceptionally low, where traded options prices are dropping towards realised volatility at under 4%. The prospect of a UK general election later this year has had no discernible impact on FX markets so far and is reminiscent of 1997, where a consistent 20%+ lead in the opinion polls for Labour was no source of drama for sterling.

The UK data calendar remains light for the week ahead. We do have a few Bank of England speakers, however. Today, let's see whether Deputy Governor Sarah Breeden echoes recent remarks from BoE Governor Andrew Bailey that the market is right to price BoE rate cuts this year. She speaks at 5:30pm CET. For reference, markets currently price 75bp of BoE easing this year.

CEE: Inflation prints to change FX direction

Following central bank guidance last week, this week we have a pretty heavy calendar with plenty of hard data from the economy, including inflation prints across the CEE region. Today in the Czech Republic we will see industrial production, foreign trade and construction. Tomorrow in Romania, the final fourth quarter GDP numbers will be released. On Wednesday in the Czech Republic, inflation for March will be published. We expect inflationary pressures to slow further, leading headline from 2.0% to 1.9% year-on-year, slightly below market expectations.

On Thursday, March inflation figures will also be published in the rest of the region. In Romania, we expect a decline from 7.2% to 6.7% YoY, slightly below market expectations. In Hungary, we expect a decline from 3.7% to 3.6%, in line with expectations. On Friday In Romania, industrial production and wages will be released, while in Poland and the Czech Republic we will see current account statistics.

CEE FX ended last week with gains across the board and we remain positive to start the week. However, we believe inflation numbers will change the picture this week given the hawkish direction of the market in recent weeks. Particularly in the Czech Republic and Hungary, we believe inflation numbers below central bank estimates will reopen the rate-cutting discussion and may trigger a downward repricing in the rates space. For this reason, we see the HUF most vulnerable this week, having posted a strong rally last week moving below 390 EUR/HUF for the first time since late February.

For EUR/CZK, we rather expect an offset of the potential coming from the current higher rates. We expect stabilisation around 25.30 EUR/CZK for now. EUR/PLN reached 4.280 after the National Bank of Poland's meeting – the level we mentioned previously – and we consider it fair for now, unless we see more repricing in the rates space higher, which cannot be ruled out after the hawkish press conference on Friday.

For a look at all of today’s economic events, check out our economic calendar.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Ukadike Micheal

Economic

Forex

Traders are adjusting their expectations for Federal Reserve interest rate cuts in 2024, with markets now indicating a preference for two reductions instead of three. Interest-rate swaps suggest approximately 60 basis points of monetary easing this year, with the likelihood of two cuts, the first anticipated by September. On Monday, Treasuries experienced a decline, pushing the two-year yield up three basis points to 4.78%. Yields on 10-year debt are approaching the significant 4.5% threshold, which some investors see as pivotal in determining whether rates will revisit last year's highs.

Despite expectations for rate cuts easing, uncertainties persist. US economic data remains robust, prompting some Fed officials to push back against the need for easing and even hint at the possibility of rate hikes if inflation progress stalls. Investors are closely monitoring upcoming consumer price data to gauge inflation dynamics further.

Earlier in the year, there were widespread expectations that the Fed's series of rate increases over the past two years would alleviate inflation pressures and potentially lead to economic strain. This sentiment led to market speculation of as many as six rate cuts in 2024. However, progress toward lower inflation has been slower than anticipated, and economic growth metrics have remained strong. Investors continue to pour funds into stocks and corporate bonds, indicating a perception that the economy may not require immediate rate cuts.

The shift in market sentiment has caused a sell-off in Treasuries, disrupting the portfolios of investors who had anticipated a bond rally. Despite these challenges, some asset managers remain optimistic, betting that when Fed cuts do materialize, they will ignite a much-awaited rally.

From a technical standpoint, the evolving expectations around Fed rate cuts are likely to impact various sectors of the market differently. For instance, a reduction in interest rates typically stimulates borrowing and spending, which can benefit sectors like housing and consumer discretionary. Conversely, sectors sensitive to interest rate changes, such as banking and financial services, may experience some volatility as expectations adjust.

While the market is recalibrating its expectations for Federal Reserve rate cuts in 2024, uncertainties remain regarding the timing and extent of these cuts. The upcoming inflation data will provide crucial insights into the trajectory of monetary policy. As investors navigate this landscape, they must remain vigilant and adaptable to potential shifts in market dynamics.

Source: Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Alex

Economic

Political

The Bank of Israel is set for a close interest-rate call on Monday, with analysts almost evenly split between those predicting a cut to boost the war-damaged economy and those seeing monetary authorities keeping policy steady to protect the shekel.

A narrow majority of economists surveyed by Bloomberg — nine out of 17 — say the central bank will hold its base rate at 4.5% for a second consecutive Monetary Policy Committee meeting. Citigroup Inc. and JPMorgan Chase & Co. are among them.

The other eight, including Goldman Sachs Group Inc., see the MPC cutting the rate by 25 basis points to 4.25%.

The consensus shifted toward a hold last week after Iran vowed revenge against Israel for a strike on Tehran’s consulate in Damascus. The attack killed at least 13 people, including two Iranian generals. Israel put its forces on high alert. Israeli stocks dropped, while the shekel suffered its second-worst week this year.

The currency rebounded by 1.1% to 3.72 per dollar as of 9:40 a.m. in Tel Aviv on Monday, in part because Iran didn’t retaliate over the weekend. Israel Faces Tough Call on Rates As War Clouds Economic Outlook_1

Israel Faces Tough Call on Rates As War Clouds Economic Outlook_1

The rising tensions contributed to Israel’s inflation outlook worsening in recent days, as measured by break-even rates. Two year break-evens have climbed to 3.17%, above the central bank’s target range of 1% to 3%.

“The increase in the risk premium of all Israeli assets combined with heightened inflation expectations, will likely place the Bank of Israel in a cautious position that will lead to a postponement in rate cuts,” said Rafael Gozlan, chief economist at Tel Aviv-based IBI Investment House.

The central bank lowered rates for the first time since the height of the covid pandemic in January, and in late February left them unchanged because of concern that inflation might accelerate as the war against Hamas in Gaza continues and the government ramps up spending on defense.

For now, inflation remains low. The year-on-year rate dropped to 2.5% last month from 4.1% in August.

“Markets have reduced the probability of a cut to 30%, but we think that chances are higher because inflation has entrenched within its target range,” said Gil Bufman, chief economist at Bank Leumi, Israel’s biggest lender by market valuation. “This could allow the bank to maintain a real interest rate of more than 1% even with a slight cut,” he said, referring to inflation-adjusted rates.

One concern for markets is the fiscal impact of the war. This year’s budget envisages a deficit of 6.6% of gross domestic product, a shortfall that would be among the biggest for Israel this century. It may turn out to be even wider if the conflict in Gaza is prolonged or if tensions with Iran and Lebanon-based Hezbollah — the Islamic Republic’s main proxy militia — worsen.

Amir Yaron, the Bank of Israel’s governor, has repeatedly said he’s concerned about fiscal policy and that it will be an important factor in determining monetary policy.

Israel’s current inflation rate “can be misleading” and “doesn’t necessarily indicate what’s in store for the future,” said Victor Bahar, chief economist at Bank Hapoalim, the second-biggest Israeli lender.

The central bank is due to release new macroeconomic forecasts after the rate decision. Jonathan Katz, a strategist at Leader Capital Market, says the bank will probably “stress its concern over a more expansionary fiscal policy.”

Katz expects the central bank’s inflation forecast for this year to rise toward 3%, up from 2.4% in January. He also sees the interest-rate outlook climbing to 4%-4.25% from 3.75%-4%.

The central bank will need to weigh rising inflation expectations against an uneven economic recovery from the first few weeks of the war. Many industries, including construction and tourism, are still suffering, even as credit-card spending rebounds.

“The economy is far from returning to its full growth potential,” said Alex Zabezhinsky, chief economist at Meitav DS Investments. “Keeping interest rates at a high level may reduce market volatility in the short term, but increase the risk to the economy and market stability moving forward.”

Source:Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

Stocks

Asian shares started the week on a subdued note on Monday, while the dollar was steady as investors weighed when the U.S. Federal Reserve will start cutting rates in the wake of yet another blowout jobs report.

Oil prices fell more than 1% as Middle East tensions eased after Israel withdrew more soldiers from southern Gaza, while gold prices extended their record rally and touched a new all-time high.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS), opens new tab was 0.17% higher, while Tokyo's Nikkei (.N225), opens new tab rose 0.78%.

European stock markets looked set for a muted open, with Eurostoxx 50 futures up 0.04%, German DAX futures up 0.05% and FTSE futures 0.10% higher. E-mini futures for the S&P 500 eased 0.10%.

Data on Friday showed U.S. job growth blew past expectations in March and wages increased at a steady clip, suggesting the economy ended the first quarter on solid ground.

"Resilient economic data are a double-edged sword for markets," said ANZ strategists in a note. "On the positive side, resilient growth indicates an economy far from recession, but it could also mean the Fed will keep rates higher for longer."

Markets are now pricing in a 48% chance of an interest rate cut from the Fed in June, the CME FedWatch tool showed, down from around 60% a week earlier, with July shaping up to be the new starting point for the eagerly awaited easing cycle.

U.S Labor Department data showed employers hired far more workers in March than expected and kept steadily lifting wages, suggesting the economy ended the first quarter on solid ground.

Investors are also pricing in 62 basis points of cuts this year, less than the 75 basis points the Fed has projected.

Investor focus this week will be on the U.S. consumer price index (CPI) report, which is expected to show core inflation slowing to 3.7% in March from 3.8% the prior month.

If inflation data in the next two months show a downward trend, the Fed may still be open to a rate cut in June, according to Vasu Menon, managing director of investment strategy at OCBC Bank in Singapore.

"But if the trend in January and February of sticky, slowing disinflation persists, then a reassessment may be in order."

Meanwhile, China mainland stocks reopened after extended holidays from Thursday, with the blue-chip gauge (.CSI300), opens new tab 0.45% lower. Hong Kong's Hang Seng Index (.HSI), opens new tab rose 0.33%.

RISING YIELDS

The changing expectations on the outlook for U.S. rates have lifted Treasury yields, with the two-year Treasury yield, which typically moves in step with interest rate expectations, up 4.8 basis points at 4.780%, the highest in over four months.

The yield on 10-year Treasury notes was up 4.6 basis points to 4.424%.

The elevated yields boosted the dollar, with the euro down 0.04% to $1.0831, while sterling was last at $1.2627, down 0.07% on the day.

The Japanese yen weakened 0.11% to 151.77 per dollar as traders remain on alert for possible intervention by Japanese authorities.

Nicholas Chia, Asia macro strategist at Standard Chartered, said the yen will be vulnerable to a materially strong U.S. CPI report, with "intervention speak likely to be back on the agenda".

The dollar index , which measures the U.S. currency against six rivals, was at 104.34.

The European Central Bank is due to meet later this week and is widely expected to keep rates steady. Investors see almost no chance of a cut on April 11 but have fully priced in a move for June, followed by another two or three steps later this year.

In commodities, spot gold added 0.6% to $2,343.49 an ounce, having breached record peak last week.

U.S. crude fell 1.51% to $85.60 per barrel and Brent was at $89.75, down 1.56% on the day.

Israel and Hamas sent teams to Egypt for fresh talks on a potential ceasefire ahead of the Eid holidays, easing tensions in the Middle East that drove up oil prices by more than 4% last week on concerns of supply disruption.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Samantha Luan

Economic

Bond

Everyone expects the Federal Reserve to “pivot” – to lower interest rates – primarily because inflation appears to be under control. But the economy and stock market are on an upward trajectory, so they don’t need stimulation.

So, the real question becomes “Where should interest rates be now?” History can be our guide. Over the 98 years from 1926-2023, inflation has averaged 3%, so about the current level. Treasury Bills have yielded the rate of inflation and Treasury bonds have returned 2% above inflation, about 5%.

As shown in the following, Treasury Bills currently yield 2.5% more than the historical average so it’s reasonable to expect them to decline IF inflation remains at 3%. But long-term government bonds are earning 0.5% less than the historical average, so long-term rates can be expected to increase, and to increase more than 0.5% if inflation increases.

Why the departures from averages?

The Federal Reserve controls the short end of the yield curve. It sets short term interest rates. These rates are currently high by historical standards because the Fed is fighting inflation, so it wants to slow down the economy. Lowering interest rates would stimulate the economy and stock market, risking higher inflation.

Investors set long term interest rates and they expect interest rates to decline so they’ve priced in lower yields that create an inverted yield curve that is not normal. Investors normally demand higher yield for taking on the risk in long term bonds. Inversions don’t last long and usually precede a recession. It makes no sense for investors to buy riskier bonds that pay less.

If inflation increases

$5 trillion in COVID spending is working its way through the economy and will create inflationary pressures.

For sake of discussion, let’s say inflation increases to 6%. It was at 9% not too long ago in July of 2022. If that happens, long-term government bond yields will increase to 8% (2% above inflation). This 3.5% increase will generate a 21% decline in bond prices. And there would be little change in short-to-mid term Treasury Bill yields.

The increase in long-term yields would be necessary to attract investors. As explained in America's biggest bond buyers aren't buying bonds, China and the Federal Reserve – the 2 largest buyers – are not buying currently, so “ Without these two seemingly bottomless sources of demand for American bonds, Uncle Sam has to offer higher yields than it otherwise would have, to get the money it needs from investors.” The Treasury issues bonds to finance the deficit.

The debt spiral

Interest on our $34 trillion debt is $870 billion, which is 2.6% of the debt because the Fed has engineered ZIRP – Zero Interest Rate Policy. $616 billion of the $870 billion is paid out of $4.4 trillion in tax revenues and the remaining $354 billion is added to the deficit, which is running around $2 trillion in total.

If inflation increases, debt service crowds out other spending, like Social Security, and increases the deficit, as shown in the following:

Conclusion

We all want to believe that inflation is under control. If it is, short term rates will come down to approximate inflation. But long-term rates are currently below their historical average of 2% above inflation, so they will trend upwards.

If inflation increases, long-term bond yields will increase significantly and a debt spiral will begin.

Source: Seeking Alpha

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

Forex

The Euro to Dollar exchange rate recovered the sharp losses that initially followed last Friday's strong U.S. job report, which is significant because it tells us the bar to further USD strength is now set incredibly high.

The ECB will keep interest rates unchanged but will likely introduce guidance that readies the market for a June interest rate cut, which market participants fully expect.

For the Euro to weaken, the ECB might need to say things that encourage the market to bet on further rate cuts in the months following a June kick-off.

This could be a tall ask for those hoping for a weaker Euro. The scenario we anticipate sees ECB President Lagarde gently verifying market consensus for a June rate cut while warning that further cuts are entirely data-dependent.

This should generate enough uncertainty to keep the Euro sellers at bay and potentially push Pound-Euro lower.

"Ms. Lagarde indicating a rate cut in June on Thursday will likely prevent more EUR-USD strength, but a lack of indication on the pace of easing after June will likely offer EUR-USD a floor around 1.08," says Roberto Mialich, FX Strategist at UniCredit Bank in Milan. Euro to Dollar Week Ahead Forecast: Asymmetric Reaction Function_1

Euro to Dollar Week Ahead Forecast: Asymmetric Reaction Function_1

Above: EURUSD at daily intervals showing a well-supported, albeit capped, Euro.

Carol Kong, FX analyst at Commonwealth Bank, says there is a risk that the ECB is perceived as dovish this week as they may begin to discuss rate cuts.

"However, we do not expect more than a modest impact on EUR/USD because the market is already pricing a very high chance of a June rate cut as well as at least two more rate cuts by the end of the year. As a result, a miss on the U.S. CPI can be the main driver of EUR/USD in the week ahead. EUR/USD faces support at 1.0764," she adds.

Turning to the U.S. inflation report, the market looks for the headline CPI inflation rate to have risen to 3.4% year-on-year in March from 3.2% in February as it continues to drift further away from the Federal Reserve's 2.0% target.

The Dollar can rally should the figure exceed this, but given the reaction to the NFP data, we suspect an exceptionally strong reading would be required to deliver a significant appreciation in the Dollar.

Instead, the biggest market movement would likely follow and undershoot in the data, confirming an asymmetric FX reaction function heading into the print.

"A higher-than-expected print may add modest support to the USD but a downside surprise may see USD react more to the downside. Asymmetric DXY price action to US data is likely in the interim," says Christopher Wong, FX Strategist at OCBC.

Source: Poundsterlinglive

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

This week promises to be a rollercoaster ride for global investors, with key economic data releases and central bank pronouncements taking center stage. The United States will be a major point of focus, with the release of the Federal Open Market Committee (FOMC) meeting minutes and the March Consumer Price Index (CPI) report high on everyone's watchlist.

Inflation jitters: Investors are particularly anxious to dissect the FOMC minutes for any hints about potential interest rate cuts later this year. This urgency stems from the recent strong jobs data, which throws a wrench into the earlier narrative of a dovish Fed. The upcoming CPI report is equally crucial, with estimates pointing towards a continued rise in headline inflation to 3.4%. This, however, might be countered by a dip in the core rate to its lowest level since April 2021.

Consumer confidence takes a breather?: Adding another layer of complexity is the preliminary reading of the University of Michigan consumer sentiment index. While it's expected to dip slightly from its near three-year high, any significant decline could signal weakening consumer spending, a vital pillar of the US economy.

Beyond the US borders: The global economic calendar is equally packed. The Bank of Canada is likely to maintain its current stance, keeping rates unchanged for the sixth consecutive time. Meanwhile, all eyes will be on the European Central Bank (ECB) meeting. While a rate cut isn't anticipated, the focus shifts towards the ECB's communication strategy and hints on the potential size and timing of future cuts.

Inflation remains a global concern: Europe isn't immune to inflationary pressures either. Although Russia is predicted to hold steady at a 1-year high of 7.7%, key data from Mexico, Brazil, and India will also be scrutinized for inflation trends.

China in the spotlight: In Asia, China's March inflation rate and trade figures are highly anticipated. These will provide valuable insights into the effectiveness of Beijing's recent economic stimulus measures, especially after positive surprises from earlier PMI readings.

Central bank decisions galore: Several central banks across Asia, including South Korea, New Zealand, Thailand, and the Philippines, are likely to keep rates on hold, despite facing their own economic headwinds.

Rounding out the week: The economic data deluge continues with the release of the UK's February GDP figures, Japan's consumer confidence data, and Australia's business and consumer confidence surveys.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites