- US jobs, productivity, and inflation expectations to steer Fed rate path.
- RBA and Norges Bank to hike. Riksbank on hold.
- Ballot test for UK Prime Minister Starmer.
Navigation flow through the Strait of Hormuz remains constrained with no clear endgame to the ten-week long blockade. President Donald Trump wrote on Saturday “I will soon be reviewing the plan that Iran has just sent to us [Iran on Thursday gave the US a 14-point updated proposal for a framework agreement], but can’t imagine that it would be acceptable in that they have not yet paid a big enough price for what they have done to Humanity, and the World, over the last 47 years.”
As such, crude oil prices will remain supported and currency performance will continue to largely reflect a country’s energy balance (production minus consumption). The means NOK, CAD, AUD retain a relative edge mostly versus EUR and JPY.
The US has a positive net energy balance, but interest rate differentials between the US and other major economies will keep the dollar index (DXY) anchored near the middle of its nearly one-year 96.00-100.00 range. Last week, the Fed, ECB, BOJ, BOE, and BOC all left rates unchanged with a hawkish twist across the board.
US Jobs, Productivity, and Inflation Expectations to Steer Fed Path
The Fed signaled last week that it was comfortable keeping policy “mildly restrictive, or neutral”, while it waits to see if above-target inflation proves stubborn. Fed funds futures imply steady rates by year-end. We still think the Fed can deliver one 25bps cut this year, but our conviction is low. This week’s US data can either rekindle bets of a cut or validate market pricing that the Fed is done easing.
April nonfarm payrolls (Friday) and March JOLTS data (Tuesday) are expected to point at a stabilizing labor market. Consensus is looking for +62k job gains vs. +178k in March and the unemployment rate is seen unchanged at 4.3% in April, a tick below the FOMC 2026 projection (4.4%). In parallel, the latest JOLTS report is consistent with the so-called “low-hire, low-fire” labor market backdrop. Both the hiring and opening rates are drifting lower while the layoffs rate remains low.
It’s worth noting that in the three months to March, employers added an average of 68k jobs to payrolls each month. That pace of growth is well within the breakeven range that is necessary to keep the unemployment rate steady given the slowdown in overall labor force growth. A recent Fed research note estimates the breakeven pace of employment growth to average 18k in 2026, substantially lower than at any point in the past 65 years.
Q1 non-farm productivity report is due on Thursday. Productivity (GDP/hours worked) is expected at 1.0% SAAR vs. 1.8% in Q4 and continue to grow around its the post-war average of 2.1% y/y. At that annual pace of growth, productivity is a disinflationary force given that it absorbs part of the 3.4% y/y gains in wages.
That should keep inflation consistent with the Fed’s 2% goal and leave room for the Fed to deliver another rate cut this year. Indeed, the Dallas Fed trimmed mean PCE and the Cleveland Fed median PCE - Kevin Warsh’s favorite gauge of underlying inflation – remained stable under 3% in March..
The New York Fed and University of Michigan consumer surveys are due Thursday and Friday, respectively. Specifically, long-term inflation expectations are critical to watch as any drift higher would push the FOMC towards a more hawkish bias.
Triple Header: RBA, Riksbank, Norges Bank
The Reserve Bank of Australia (RBA) is expected to deliver a third consecutive 25bps cash rate target hike to 4.35% (Tuesday). Cash rate futures imply 74% odds of a hike. Our base case is for the RBA to raise rates, which bodes well for AUD. Australia trimmed mean CPI inflation is sticky above the RBA’s 2-3% target range and all the RBA’s internal models show a positive output gap consistent with tighter capacity constraints. The RBA’s May Statement on Monetary Policy will shed light on the bank’s inflation and growth outlook.
The Riksbank is widely expected to keep the policy rate at 1.75% for a fifth consecutive meeting (Thursday). The March Monetary Policy Report (MPR) showed the bank pencils in the policy rate at 1.75% until Q4 2026, followed by a 25bps hike to 2.00% by Q1 2028. The swaps curve is more aggressive and price in 100bps of rate hikes to 2.75% in the next two years. Ample spare capacity in the Sweden economy argues for a shallower tightening path than priced, which is a drag for SEK.
The Norges Bank is seen leaving the policy rate unchanged at 4.00% for a fifth consecutive meeting but it’s a close call (Thursday). The swaps market price in 54% probability of a 25bps hike this week to 4.25%. We expect the Norges Bank to hike because underlying CPI inflation remains sticky at 3.0% y/y.
In March, the Norges Bank highlighted “the inflation outlook implies that it will likely be appropriate to raise the policy rate at one of the forthcoming monetary policy meetings.” The bank’s policy rate path implies between 25bp and 50bps of hikes by the end of this year, which is in line with swaps market pricing. Energy-sensitive NOK leads G10 FX performance since the Iran war began on February 28, a trend likely to continue.
Ballot Test for Starmer
Thursday’s local and Scottish elections will test British Prime Minister Keir Starmer’s leadership. Starmer’s Labour Party is poised to get trounced, potentially setting the stage for a leadership challenge. A leadership contest can be triggered if the leader resigns or a challenger secures the backing of at least 20% of Labour MPs.
Starmer is the most unpopular British prime minister since record began, even worse than Liz Truss’s 49-day in office. As such, his exit will not be a big shock to financial markets. The surprise would be if he managed to stay on as prime minister. Regardless, with or without Starmer, the governing Labour Party faces an uphill battle to restore fiscal credibility. UK nominal GDP growth is tracking below 10-year gilt yields, making stopping debt growth very difficult and is an ongoing drag on GBP.
Canada Job Check
Canada April labor force survey is due on Friday. The economy is expected to add +10.0k jobs in April vs. +14.1 in March. Risks are skewed to the upside given the improvement in firms’ hiring intentions. Nonetheless, employment growth has generally been subdued and contracted by an average of -31.5k in the past three months.
The swaps curve price in 60bps of Bank of Canada (BOC) rate hikes in the next twelve months. That looks too aggressive in our view as Canada underlying inflation and long-term inflation expectations remain contained. Moreover, the BOC estimates the output gap over Q1 2026 to be between -1.5% to -0.5% while a range of indicators suggest some slack in the labor market.
Bottom line: the drag to CAD from a possible downward adjustment to the swaps curve is more than offset by the positive terms of trade shock to Canada’s economy from higher crude oil prices.
NZ Jobs in Focus
New Zealand Q1 labor market data is due on Tuesday. Employment is expected to rise 0.3% q/q (RBNZ forecast: 0.4%) vs. 0.5% in Q4, the unemployment rate is seen unchanged at 5.4% (RBNZ forecast: 5.3%), and private regular wages are anticipated to increase 0.4% q/q (RBNZ forecast: 0.4%) for a second straight quarter.
The swaps market implies a first full 25bps RBNZ rate hike at the July 8 meeting, and a total of 125bps of tightening over the next twelve months to 3.50%. The risk is the RBNZ delivers less rate increases than is currently priced in which is a headwind for NZD. The RBNZ sectoral factor inflation model dipped to 2.7% y/y in Q1 vs. 2.8% in Q4 and the bank forecasts a negative output gap of -0.9% over 2026.
JPY: Definitely Maybe Intervention
USD/JPY plunged by nearly 5 figures last Thursday to a low around 155.50 on possible FX intervention. Finance Minister Satsuki Katayama declined to confirm whether the Ministry of Finance (MOF) instructed the Bank of Japan (BOJ) to intervene. But if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
The MOF’s report on Foreign Exchange Intervention Operations for April 28 through end-May will be released on May 29. We suspect the latest intervention was around ¥5 trillion based on the 2024 playbook – the last time the MOF/BOJ intervened to curb JPY weakness - and scale of USD/JPY pullbacks:
On April 29, 2024, the BOJ bought ¥5.92 trillion and USD/JPY dropped as much as 5.6 figures from an intra-day high of 160.17.
On May 1, 2024, the BOJ bought ¥3.87 trillion and USD/JPY dropped as much as 5 figures from an intra-day high around 158.00.
On July 11, 2024, the BOJ bought ¥3.17 trillion and USD/JPY dropped as much as 4.3 figures from an intra-day high of 161.76.
On July 12, 2024, the BOJ bought ¥2.37 trillion and USD/JPY dropped as much as 2 figures from an intra-day high around 159.45.
Nonetheless, the BOJ’s cautious normalization cycle, high bar for additional Fed easing, and upside pressure on energy prices suggest USD/JPY should hold above its 200-day moving average (154.11) in the near-term.
Japan’s March labor cash earning data (Thursday) is unlikely to shift the dial on BOJ rate expectations. The swaps curve is pricing over 60bps of BOJ policy rate hikes in the next twelve months to between 1.25% and 1.50%. Japan’s underlying inflation backdrop supports the BOJ’s cautious tightening path. The BOJ’s trimmed mean, weighted median, and mode CPI inflation are below the bank’s 2% target. While its three measures of CPI excluding institutional factors (like changes to consumption tax) are converging towards 2%.
EM Central Bank Watch
National Bank of Poland (NBP) is widely expected to keep the policy rate unchanged at 3.75% for a second straight meeting (Wednesday). NBP will likely signal that its easing cycle, which saw it deliver 200bps of cuts in the past year, is over. Poland headline and core CPI inflation are tracking above the NBP’s Q1 projection of 2.2% and 2.6%, respectively. The drag to PLN from higher crude oil prices is partly offset by Poland’s positive real rates and a favorable balance of payments backdrop. USD/PLN should hold under 3.6700.
Mexico’s central bank (Banxico) policy decision is Thursday. Banxico is widely expected to deliver a back-to-back 25bps rate cut to 6.50%. The risk is Banxico signals a high bar to ease further as the real policy rate (3.2%) is within bank’s neutral range estimate [1.8% to 3.6%, with a midpoint of 2.7%]. The swaps curve price in one final 25bps cut this week, followed by total of 50bps of hikes over the next twelve months which offers MXN support.
The Czech Central Bank (CNB) policy decision is Thursday. CNB is widely expected to keep the policy rate at 3.50% for an eighth consecutive meeting. Board members generally agree that interest rates are at the right level and it would be premature to consider raising them in response to the conflict.
In fact, Deputy Governor Eva Zamrazilova stressed last week “I really think that we are in a quite comfortable situation for now…Inflation is still expected to remain inside the tolerance range within the policy horizon even if we don’t react with rates in the near future.” The drag to CZK from higher crude oil prices is partly offset by the Czech Republic positive real rates and a favorable balance of payments backdrop. USD/CZK should hold under 21.0000.
Bank Negara Malaysia (BNM) is widely expected to leave the policy rate on hold at 2.75% for a fifth consecutive meeting (Thursday). BNM is also poised to maintain its neutral bias, reiterating that it “considers the monetary policy stance to be appropriate and supportive of the economy amid price stability.” The drag to MYR from higher crude oil prices is partly offset by Malaysia’s positive real rates and a favorable balance of payments backdrop. USD/MYR should hold under 4.0000.
