Dollar consolidates softer ahead of tomorrow's CPI

Overview: The dollar is trading with a softer bias in mostly narrow ranges against the G10 currencies. It did not rally much ahead of the US jobs data, and it was not able to sustain the upside momentum afterward, despite the jump in US yields. For St. Louis Fed President Bullard, who still has a strong reputation in the market, told Bloomberg TV yesterday that three cuts were his base case this year. The Scandis and Antipodeans are the strongest today, up about 0.25%-0.33%. The dollar continues to hold below JPY152 barely. Most emerging market currencies are also firmer today. The dollar continues to trade just inside its band against the onshore yuan.

Most of the large Asia Pacific equity markets rallied, led by a 1.85% gain in Taiwan and a 1.1% advance by the Nikkei. South Korea was a notable exception and the won traded lower too. Europe's Stoxx 600 is trading a little heavier after gaining almost 0.5% yesterday. US index futures are slightly firmer. Benchmark 10-year yield are 3-4 bp lower in Europe, and the 10-year US Treasury is off three basis points to about 4.39%. The year's high was set yesterday closer to 4.46%. Gold continues to march higher. A new record was reached today, a little more than $2365.35. In the last 11 sessions coming into today, gold has fallen once. It is up more than 1% today, which if sustained would be the fourth such gain in eight sessions. After recovering strongly from around $84.70 yesterday to settle near $86.60, May WTI has struggled to sustain the upside momentum and stalled near $87 today and is consolidating ahead of the North American session.

Asia Pacific  

The first state visit by a Japanese prime minister to the US in nine years has begun. We suggest this makes for a difficult backdrop for Japanese officials to intervene in the foreign exchange market. It would be undiplomatic and could mar the meetings. With the Fed still hesitant to cut rates, a strong dollar is part of the anti-inflation efforts. If it has been the fear of intervention that has made the market cautious near JPY152, the reduced chances of intervention could encourage the market to push the greenback above this important psychological and technical cap. Separately, Japan reported preliminary March machine jumped 18.8% in March, led by a 51% surge in domestic orders and a nearly 6% rise in foreign orders. Orders collapsed by 12.7% in January. Domestic and foreign orders fell for the first time since last October (20% and 9.5%, respectively). The earthquake on January 1 was disruptive. There was a modest rebound (2.9%) in February. Domestic orders rose by 6.3% and foreign orders by 1.6%. The recovery in capex should help underpin the Japanese economy. 

China's lending figures are due any day this week. The March CPI and PPI are due first thing tomorrow. The February CPI may have been flattered by the spending associated with the Lunar New Year celebration, and this may partly unwind in March. The conventional narrative says that the weak CPI is a function of weak demand. Yet, the CPI is heavily weighted toward food, which and demand seem somewhat inelastic. A key driver remains pork prices and this is more a function of supply efforts to rationalize the swine herd, which includes reducing the retention target of breeding sows. In addition, the overproduction that conventional narrative emphasizes is a function, ironically, of competition, which is driving down domestic prices, including autos.

The Reserve Bank of New Zealand meets first thing tomorrow. There is practically no chance of a cut in the 5.5% overnight target rate, even though the recent string of economic data has disappointed. Recall that the New Zealand economy contracted in four of the last five quarters through the end last year. The hindrance stems from firm price pressures (Q1 24 CPI is due next week, April 17). New Zealand is the last of the G10 countries that does not have a monthly inflation report. As of Q4 23, New Zealand's CPI was 4.7% year-over-year. The swaps market has about a 40% chance of a cut in July and is nearly fully priced in for August. There are two cuts discounted and about a 50% chance of a third. The New Zealand dollar has lost about 4.6% against the US dollar so far this year, and about 1.5% against the Australian dollar.

The dollar's high against the yen was set in early North American turnover near JPY151.95. It pulled back to almost JPY151.70 and was confined most of the remainder of the session in a little more than five ticks on either side of JPY151.80. The dollar remains firm in a roughly JPY151.75-JPY151.95 range today. The Australian dollar, which had slipped to about $0.6550 before the weekend, recovered to approach the two-and-a-half-week high set on April 3 near $0.6620. Yesterday, it settled above the downtrend line off the March 8 high, found near $0.6590. It is in an exceptionally narrow range so far today of about $0.6600-$0.6625. There are options for A$980 mln at $0.6620 that expire today. Above there, nearby resistance is seen in the $0.6635-40 area. The US dollar posted its lowest settlement against the offshore Chinese yuan yesterday since March 21 (~CNH7.2430) and closed below its five-day moving average (~CNH7.2485) for the fifth consecutive session. Yet, the dollar remains above the onshore band in the offshore market. The 2% band today is CNY6.9537-CNY7.2375. The PBOC set the dollar's reference rate at CNY7.0956 (CNY7.0947 yesterday) as it continues to resist the upward pull of the greenback. The average in the Bloomberg survey slipped to CNY7.2262 (CNY7.2279 yesterday). It was the third consecutive decline.

Europe  

The key events for Europe this week are in the second half of the week: the ECB meeting (Thursday) and the UK's February monthly GDP print (Friday). The market is fairly confident of a June cut (~90% chance priced into the swaps market). However, the market is straddling the fence about a cut at the following meeting (July 18). There are three cuts discounted for this year and about a 40% chance of a fourth cut. Recall that in the frenzy at the end of last year, there are at the peak 190 bp of cuts priced in for this year The nearly 85 bp currently discounted is the lower end of where it has traded this year (82.2 bp on February 22 was the least). The ECB's bank lending survey, released today, confirmed a tightening of lending standards and a decline in demand. There is also a modest easing in mortgage lending for the first time since late 2021. The UK economy appears to be continuing to recover from the contraction in H2 23. The economy grew by 0.2% in January and is expected to have grown by about 0.1% in February. The risk seems more biased to the downside (flat) rather than the upside (to match January's pace).

The euro and sterling settled higher yesterday than they did before the US jobs data last Friday. Given the strength of the data and the rise in US yields, the resilience of the euro and sterling is notable. Moreover, the economic divergence will likely underscore this week, with an ECB maintaining its signal of a likely June cut and the UK's minor growth that is expected, while neither the employment data nor tomorrow's CPI are likely to boost the Fed's confidence in the trajectory of prices. Ironically, yesterday, the euro posted its highest settlement ($1.0859) since March 21, the day after the last FOMC meeting. Last week's high was set slightly above $1.0875, just in front of the (61.8%) retracement (~$1.0880) of the losses since the last jobs report in early March. It is in a narrow range of about $1.0850-$1.0870 today. Sterling settled at its best level (~$1.2955) since March 21 as well. It is also in a tight range so far today: ~$1.2650-$1.2685. Nearby resistance is seen in this area, which houses last week's high, the (50%) retracement of the losses since March 21, (38.2) of the losses since the year's high on March 8 (~$1.2895), and the 20-day moving average. There are also options for about GBP755 mln struck at $1.2675 that expire tomorrow. Above there, potential extends toward $1.2700-50.

America

The highlight of the week, the US March CPI is due tomorrow. The month-over-month change is supposed to tick down to 0.3% from 0.4% in February (both headline and core). Given the base effect (0.1% headline increase in March 2023 and 0.3% increase in the core rate), the year-over-year rate may rise to 3.4% from 3.2%. The core rate, due to rounding, may slip to 3.7% from 3.8%. It would be the third month in the past four that the headline year-over-year rate increased. A 0.3% increase would mean that at an annualized rate, headline CPI rose by 4.0% in Q1 24, up from 2.0% in Q4 23. and matching the increase of Q1 23. A 0.3% increase in the core rate translates into a 4.4% annualized rate in Q1 24 up from 3.2% in Q4 23 and 4.8% in Q1 23.

The Bank of Canada meets tomorrow. None of the 25 economists Bloomberg surveyed expected a cut and the swaps market has slightly less than a 20% chance discounted. Headline inflation has surprised to the downside in January and February, and underlying core inflation is also subsiding. On the heels of another disappointing jobs report we look for Governor Macklem indicate barring a new shock, that conditions are falling into place for lower rates. The market has about an 80% chance of a June cut and has nearly three cuts discounted for this year.

Mexico reports March CPI today. The headline rate is expected to have edged up to 4.50% from 4.40%. This would be the fourth increase in the past five months. Headline CPI bottomed last October near 4.25%. The median forecast in Bloomberg's survey is for the core measure to tick down to 4.63% from 4.64%. This would extend the uninterrupted decline since last January when it stood at 8.45%. Banxico delivered a hawkish cut last month. There were two elements that tilted the first cut in a hawkish direction. It tweaked higher its year-end forecast for CPI, and it explicitly did not commit to an easing sequence. The swaps market has about a 50% chance discounted of a rate cut in the next three months. The next meeting is May 9. The election is June 2, and Banxico s meeting following it is on June 27 and August 8.

After rising to new highs for the year before the weekend, the US dollar consolidated against the Canadian dollar. Although it had traded above CAD1.36 in the Asia Pacific session, the US dollar remained below it in North America. Instead, it recorded the session low near CAD1.3570. It is trading a little softer today. A break, and ideally a close, below CAD1.3540 would suggest that last week's push high was exhaustion rather than a genuine breakout. It could sour a move toward the CAD1.3460-80 area. The greenback slumped to new lows against the Mexican peso. It has not seen these levels since August 2015. It reached almost MXN16.31. The dollar has taken another step lower today to nearly MXN16.26. With the carry persisting, the first Mexican presidential debate throwing no surprises, leaving Sheinbaum with a strong lead center-right alliance candidate Galvez and the third-party candidate Maynez, the peso may have more room to run. While the MXN16.22 area may be interesting, the next significant area is around MXN16.00. Meanwhile, the market seems more concerned about the political developments in Brazil than Mexico, and the immediate focus is on the governance of Petrobras. Brazil reports March IPCA inflation tomorrow. It is expected to slow to around 4% from 4.5%. It would be the lowest since last July and the sixth consecutive moderation. The dollar set a new high for the year in the middle of last week near BRL5.0915. It settled slightly below BRL5.03 yesterday and a convincing break of BRL5.00 would suggest a near-term top is place. Support is seen near BRL4.95.