USD: Today’s employment cost index will be decisive
Currency markets are slightly calmer today, helped by some stability in Chinese asset markets. The renminbi, a key contributor to recent currency volatility, firmed a little as China’s Politburo promised to do more to support growth. The strong rally across the USD/Asia FX complex over the past week has contributed to overall dollar strength, although this trend may now be due for pause. Far from China’s commitment to support growth, we have seen the Japanese and Korean authorities express their “extreme concern” about the recent weakness of their currency and an implicit desire to act.
It looks like unilateral Japanese FX intervention is much closer – perhaps we are at DEFCON2 in terms of preparation – and we are now about to witness the first Japanese FX intervention in more than a decade. ‘a decade. Such an intervention could probably see several billion dollars sold (usually during a European or American open). However, the reasons why USD/JPY is trading above 130 are well documented and any correction of, say, the 127/128 area will see the emergence of many new dollar buyers.
For today though, the dollar is squarely focused on US price data. We will see the release in March of one of the Fed’s favorite price indicators – the PCE deflator. This is expected at a new cycle high of 6.7% YoY. Perhaps even more important is the quarterly Employment Cost Index (ECI) data, a key indicator of US productivity. A sharp rise in the ICE is expected at 1.1% quarter-on-quarter. Assuming this shows, expect Fed tightening cycle prices to remain firm. Currently, the market is pricing the fed funds rate at 2.88% by the end of the year and currently expects the final fed funds rate at 3.15% next year. The recent peak in expectations was 3.30%.
DXY may be due for some consolidation below 104 as the technical indicators are recording very overbought readings. Still, there will be plenty of dollar buyers ready to dip and looking to position themselves for a summer rally in the dollar as the Fed tightens the monetary brakes.
EUR: Upside risks on the April CPI
Our Eurozone macro team sees upside risks in April’s Eurozone CPI release, where consensus stands at 7.5% YoY for the stock and 3.2% for the heart. A figure above consensus will no doubt attract ECB hawks. However, the euro zone money market is already pricing in an 87 basis point tightening this year – a pricing that has done little to help the euro. And there is evidence that in the event of a sudden European gas stop, the ECB will find it difficult to offer a rate hike of more than 50bp – thereby normalizing the deposit rate to zero. We will also get a first look at 1Q22 Eurozone GDP data today, which is expected to generate a modest 0.2% QoQ expansion.
After briefly dipping below 1.05 yesterday, EUR/USD regained some composure today. The international environment (stronger Asia) favors a certain consolidation of the EUR/USD in the short term. This could mean a limited correction to 1.0560/70, with outside risk at 1.0650. But we will revise our base case of a 1.05 to 1.10 range this year for a possible downgrade on the back of a Fed taking rates into restrictive territory and the challenges Europe faces.
Elsewhere today we will see the Polish CPI for April which is expected at 11.4% YoY. Our team sees upside risks to this figure – a figure that should cement expectations of a 100 basis point rate hike from the National Bank of Poland next week. EUR/PLN could return to the 4.62/63 area on that day – although events in the East will prevent it from advancing much further towards 4.50 – our target when conditions stabilize.
Cable has come a long way very quickly and is now trying to recover the big 1.25 level. As we discuss in our Bank of England overview, short-term financial fair value models have gone a bit awry, where yield curves and stock markets are now bigger drivers of sterling than the rate spreads. In other words, it looks like the pound is trading more on growth prospects right now.
European FX could get a little boost today if the Eurozone CPI surprises on the upside and the ECB hawks come out strong. This could take EUR/GBP back to 0.8450/60, but stronger EUR/USD could take GBP/USD back to the 1.2570/2600 area that day.
RUB: Consensus expects Russian rates to cut by 200bps today
The Russian central bank is expected to cut rates by 200bp today to 15%. This will be another cancellation of the emergency 10% rate hike put in place after the collapse of the ruble following Western sanctions. The rate cut is expected now that USD/RUB is trading artificially at a very low level of 72 – pushed by the absence of natural buyers (foreigners cannot sell Russian assets and Russian imports have collapsed) and the continued sale of energy exchange earnings.
Additionally, the market will be interested to see if the central bank eases capital controls today in light of the ruble’s strength. No changes are expected on controls for foreigners, but imposed currency sales for the Russian exporting community have recently been eased. Any easing of controls for domestics could see the ruble weaken, a sign that the Russian authorities want a weaker ruble for fiscal purposes.