Dollar Rebounds

November 20, 2024
  • The Atlanta Fed GDPNow model estimate for Q4 US real GDP growth was revised a tick higher. No major US economic data due today.
  • UK inflation heats up in October. BOE to pause easing in December.
  • Eurozone negotiated wages indicator surged to a series high in Q3. ECB rate cut cycle intact.

USD is up against all major currencies and trading slightly under last week’s cyclical high. The bias is for a stronger USD because there is greater room for an upward reassessment in US interest rate expectations relative to other major economies. The US economy is still tracking above long-run annual trend growth of 1.8%. The Atlanta Fed GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in Q4 is 2.6%, up from 2.5% on November 15.

Fed speakers today include: Vice Chair for Supervision Barr (10:00am New York), Governor Cook (11:00am New York), Governor Bowman (12:15pm New York), and Boston Fed President Collins (2025 voter) (4:00pm New York).

GBP is down against USD but outperforming on the crosses as UK inflation gained traction in October. Headline CPI rose to 2.3% y/y (consensus and BOE forecast: 2.2%) vs. 1.7% in September driven by electricity and gas prices. Core CPI and services CPI increased 0.1pts to 3.3% y/y (consensus: 3.1%) and 5.0% y/y (consensus: 4.9%, BOE forecast: 5.0%), respectively.

Stubbornly high UK services price inflation reinforces the case the BOE pauses easing at its December 19 meeting. Markets are pricing-in less than 10% odds of a 25bps BOE rate cut next month. The ECB is more dovish, suggesting EUR/GBP can edge lower. BOE Deputy Governor Ramsden speaks on monetary policy (11:00am New York).

EUR/USD is holding under 1.0600. The ECB Eurozone negotiated wages indicator surged to a series high of 5.42% y/y in Q3 vs. 3.54% in Q2 on faster German pay growth. However, the Bundesbank noted yesterday that strong German wage growth likely peaked. Indeed, the ECB’s forward-looking wage tracker points to a sharp easing in Eurozone wage pressures. Bottom line: the ECB is on track to deliver the 150bps of rate cuts priced-in by the markets over the next 12 months which is a drag on EUR.

The ECB November Financial Stability Review highlights three key sources of financial stability risk in the Eurozone over the next two years: (i) Stretched valuations in equity and corporate bond markets together with high-risk concentration. (ii) Rising concerns about sovereign debt level. France, Italy, and Spain are particularly vulnerable. (iii) Credit risk concerns in some cohorts of the corporate and household sectors may lead to asset quality headwinds for banks and non-banks.

USD/JPY is firmer above 155.50 following yesterday’s kneejerk geopolitical tension related drop to lows near 153.30. Japan’s cumulative merchandise trade deficit narrowed to -¥5.95tn (or -1% of GDP) vs. -¥6.07tn in September. The cumulative trade surplus with the US narrowed slightly in October but remains historically high at over ¥8.8tn (1.4% of GDP), placing Japan’s economy at a modest disadvantage in case trade tensions with the US rise.

USD/CAD retraced some of yesterday’s loss triggered by hotter than expected inflation in Canada. In October, headline inflation rose to 2.0% y/y (consensus: 1.9%) vs. 1.6% in September on slower decline in gasoline prices. Core inflation (average of trim and median CPI) increased to 2.55% y/y (consensus: 2.4%) vs. 2.35% in September, tracking above the Bank of Canada’s Q4 projection of 2.3%.

Markets trimmed odds of a 50bps Bank of Canada (BOC) December rate cut to as low as 30% vs. 40% before the CPI data. We still expect the BOC to deliver a follow-up jumbo rate cut next month because inflation is close to 2%, and inflationary pressures are no longer broad-based. Additionally, monetary policy remains too tight and raises downside risk to the economy. At 3.75%, the BOC policy rate remains above the bank’s nominal neutral interest rate estimate of 2.25% to 3.25%.

USD/CNH is holding near recent highs. As was widely expected, Chinese commercial banks left the 1- and 5-year Loan Prime Rates (LPR) unchanged at 3.10% and 3.60%, respectively. The People’s Bank of China will set its 1-year MLF rate this week and is expected to keep it steady at 2.0%. We remain skeptical that the stimulus measures announced so far will have much lasting impact on the economy.

ZAR ignored South Africa’s softer October CPI print. Headline CPI dropped to 2.8% y/y (consensus: 3.0%) vs. 3.8% in September while core CPI matched consensus falling to 3.9% y/y vs. 4.1% in September. Headline and core inflation have eased below the South African Reserve Bank’s (SARB) 4.5% midpoint range. SARB meets tomorrow and is widely expected to cut rates 25bps to 7.75%.

IDR/USD traded in a tight range around 15,865. Bank Indonesia left the policy rate steady at 6.00%, as expected by most analysts. Bank Indonesia Governor Warjiyo cautioned that “the room for rate cuts that we previously saw as wide does seem narrower now.” Warjiyo added “The focus of monetary policy is directed at strengthening rupiah stability from the impact of heightened geopolitical and global economic uncertainty with political developments in the US.” Bank Indonesia vowed again to intervene in FX spot, domestic non-deliverable forward and govt bond markets to maintain market confidence and support the rupiah.

HUF is underperforming all other EMFX. As was widely expected, National Bank of Hungary (NBH) kept rates steady at 6.50% yesterday. Only one MPC member recommended a rate cut suggesting the bar for NBH to resume easing is high which offers HUF support vs. other EMFX. Indeed, NBH noted again that “the base rate may remain at the current level for an extended period,” and emphasized that a “stability-oriented approach to monetary policy is of key importance.” The swaps market continues to fully price-in 50bps of cuts over the next 12 months.

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