Super Trouper

March 27, 2024

Super Trouper

  • Riksbank widely expected to keep the policy rate at 4.00%. Bar for a dovish surprise is high.
  • SARB widely expected to leave the policy rate at 8.25%. Another hawkish hold is anticipated.
  • USD/JPY rallied briefly to a multi-decade high.

USD is a little firmer against most major currencies. USD faces some short-term headwinds because forward-looking US economic data printed on the soft side lately. In March, the Philadelphia Fed non-manufacturing business activity index fell to near a one-year low, the Conference Board Consumer Confidence Expectations index slipped to the lowest level since October 2023, and the Richmond Fed service business condition dipped to a four-month low.

Regardless, the Fed can continue hitting the policy rate snooze button which supports the year-to-date uptrend in USD. The Atlanta Fed GDPNowcast still points at solid growth for Q1 (2.1% saar) and the Chicago Fed financial conditions index is the loosest since January 2022. There are no policy-relevant US economic data releases today. Fed Governor Christopher Waller discusses the economic outlook later today (10:00pm London).

In Europe, Sweden’s Riksbank policy rate decision and Monetary Policy Report take centre stage today (8:30am London). The Riksbank is widely expected to keep the policy rate at 4.00%. The focus instead will be on the bank’s policy guidance offered in the updated Monetary Policy Report.

In January, the Riksbank warned “the policy rate probably can be cut sooner than was indicated in the November forecast”. The November projections implied no rate cuts before end-2025. But according to the Riksbank, the possibility of the policy rate being cut during the first half of 2024 cannot be ruled out. Sweden’s OIS curve already implies an 88% probability of a 25bps cut over the next three-months. As such, the bar for a dovish surprise is high considering inflation in Sweden is largely tracking the Riksbank’s projections. Bottom line: SEK faces modest upside risk on the crosses.

EUR will likely ignore the Eurozone economic sentiment indicator (10:00am London). Economic sentiment is expected to improve to 96.2 in March from 95.4 in February consistent with a stabilisation in economic activity. ECB Executive Board member Piero Cipollone and Governing Council member Martins Kazaks are both scheduled to speak at 9:00am London.

USD/JPY rallied briefly to a fresh high at 151.97, 2pips above its 21 October 2022 high at 151.95, before settling back down near 151.70 on intervention threat. Japan’s Finance Minister Shunichi Suzuki warned again “we are watching market moves with a high sense of urgency…We will take bold measures against excessive moves without ruling out any options”. The BOJ last officially intervened to stem JPY weakness between September and October 2022.

In our view, it’s only a matter of time before USD/JPY breaks higher because we anticipate a gradual BOJ tightening process and a more muted than currently priced-in Fed easing cycle. BOJ Governor Kazuo Ueda reiterated this morning that based on the outlook for prices “accommodative financial conditions will continue for the time being”. Meanwhile, BOJ board member Naoki Tamura emphasised moving “slowly but steadily toward policy normalisation” adding “risks are slim for rapid rate hikes”. The next major technical resistance for USD/JPY after the 151.95-152.00 zone is not before 160.00 (April 1990 high).

AUD/USD edged down to lows near 0.6510 on softer than expected Australia headline CPI inflation. Australia annual headline CPI inflation printed at 3.4% for a third consecutive month in February (consensus: 3.5%). Still, the policy-relevant trimmed mean inflation rose to 3.9% from 3.8% in January supporting money market pricing for 50bps of rate cut this year.

CNY (onshore yuan) and CNH (offshore yuan) remain under downside pressure versus USD. USD/CNY is up near 7.2275, close to the upper end of the PBoC’s daily reference rate trading band (6.9527-7.2365), and USD/CNH is firmer near 7.2550. The relatively wide CNH-CNY spread of roughly 300pips points to further yuan weakness.

ZAR is outperforming ahead of the outcome of the South Africa’s central bank (SARB) policy-setting meeting (1:00pm London). SARB is widely expected to leave the policy rate at 8.25%. The higher-than-expected February CPI print suggests SARB will deliver another hawkish hold which can further underpin ZAR. At the last meeting in January, the bank delivered a hawkish hold as Governor Kganyago warned “at the current repurchase rate level, policy is restrictive, consistent with the inflation outlook and the need to address rising inflation expectations. Serious upside risks to the inflation trajectory from global and domestic sources are evident.” The swaps market is pricing in 25bps of easing over the next 12 months, followed by another 25bps over the subsequent 12 months.

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