Forex Major Currencies Outlook (Apr 24 – Apr 28)
BOJ meeting, PCE, Q1 GDP from the Eurozone and the US as well as Q1 inflation from Australia will dominate the markets in the week ahead of us.
Housing starts in March printed 1420k vs 1400k as expected, slightly down from 1432k in February while building permits showed 1413k vs 1450k as expected and 1550k the previous month. It is a mixed report, but overall trend is to the downside. High mortgage rates combined with tighter credit after the SVB collapse are constraining demand for housing and pushing the overall trend to the downside.
The yield on a 10y Treasury started the week and year at around 3.53%, rose to 3.62% and finished the week at around the 3.56% level. The yield on 2y Treasury reached at around 4.26%. Spread between 2y and 10y Treasuries started the week at -61bp then widened to -65bp and finished the week around -58bp. FedWatchTool sees the probability of a 25bp hike at 84% while probability of no change in May is at 16%.
This week we will have advanced Q1 GDP reading and Fed’s preferred inflation measure.
Important news for USD:
ECB’s Chief Economist Phillip Lane said in an interview with Bloomberg that current base case is a rate hike in May. The size of a rate hike will depend on the incoming data. Final inflation data for March was unchanged at 6.9% y/y for headline and 5.7% y/y for core.
The story of preliminary PMI data for April is divergence. Manufacturing PMI continued to decline and came in at 45.5 vs 47.3 in March while services PMI continued to rise and it came in at very healthy 56.6 vs 55 the previous month. The rise in services managed to push composite up and it came in at 54.4 vs 53.7 in March. Price pressures are falling in manufacturing due to improved supply chains and in services sector. Overall numbers indicate that Eurozone started Q2 better than expected and that fears of negative growth seem unfounded.
This week we will have a preliminary Q1 GDP reading.
Important news for EUR:
March employment report saw the unemployment rate tick up to 3.8% but other data showed strong and tight labour market. Employment change for three months ending February was up 169k vs 65 in previous month. Wages have beaten expectations and came in at 5.9% y/y and 6.6% y/y when bonus is excluded. Still elevated wages will keep pressure on prices and make BOE’s job of bringing down inflation harder.
March inflation failed to drop below double digit as it printed 10.1% y/y vs 9.8% y/y as expected. It has come down from 10.4% y/y in February but still it came in hotter than expected rising by 0.8% m/m. Inflation has been in the double digits for more than half a year. Food and non-alcoholic beverages prices as well as recreation and culture categories saw increases in prices while transport and housing and household services printed decline in prices. Core reading remained at 6.2% y/y while expectations were for it to fall to 6% y/y. This report, in combination with higher wages from employment report, will move central bank toward a 25bp rate hike in May. Markets are already pricing almost a 95% probability of a 25bp rate hike.
Preliminary April PMI data showed the same divergence as was seen in the Eurozone data. Manufacturing declined to 46.6 while services improved to 54.9 dragging the composite with them to 53.9. S&P Global notes that: “Services saw the fastest new order growth for 13 months as consumer confidence grew and spending on a few more luxuries increased. Whereas the manufacturing sector received another body blow and became more entrenched in contraction with a fall in new orders and another round of job shedding.”
Minutes from the latest RBA meeting saw board contemplate raising rates in April and then pausing before arguing that it would be better to pause right away and assess effects of monetary policy. Jobs, inflation, consumer spending and business confidence are main data point to be assessed and these data points will highest impact on AUD going forward. Inflation remains too high while jobs market remains tight. Quarterly NAB business confidence for Q1 dropped to -4 from -1 while improvement to 2 was expected. Although last week monthly survey showed improvement, quarterly has a larger sample size and tells us that companies are still struggling.
Q1 GDP from China came in at 2.2% q/q as expected and 4.5% y/y vs 3.8% y/y as expected. GDP for Q4 of 2022 was revised up to 0.6% q/q from being flat. Industrial production for March came in at 3.9% y/y, up from 2.4% y/y in February while retail sales smashed expectations and came in 10.6% y/y vs 7.4% y/y as expected and up from 3.5% y/y the previous month. Domestic consumption was the main driver of robust Q1 GDP and it is a very encouraging sign. The report removes any need for further easing to stimulate the economy and indeed one day before GDP was published PBOC has decided to keep 1Y MLF rate, 1Y LPR rate and 5Y LPR rate unchanged at 2.75%, 3.65% and 4.30% respectively.
This week we will get Q1 inflation data which will be key data point for RBA’s next decision.
Important news for AUD:
Q1 inflation came in at 1.2% q/q and 6.7% y/y vs 1.7% q/q and 7.1% y/y as expected. Overall lower energy prices have helped bring inflation down, but it is still at highly elevated levels. Core CPI, it is RBNZ “Sectoral factor model” ticked down to 5.7% y/y from 5.8% y/y in Q4. This report should not stop RBNZ from delivering another 25bp rate hike in May. Global dairy auction saw prices rise by 3.2% for the first increase after four consecutive auctions of falling prices. Skim milk powder showed the biggest increase in prices. This will give some pause to the NZD declines as dairy is their main export.
March headline CPI number came in at 4.3% y/y as expected, down from 5.2% y/y in February. Prices have been increasing at a slower pace since July of 2022 and it will keep BOC satisfied with their current monetary policy stance. Core measures are showing declines as well with median printing 4.6% y/y vs 4.9% y/y in February, trim is at 4.4% y/y vs 4.8% y/y the previous month and common is at 5.9% y/y 6.4% y/y in February. A small concern is that headline monthly figure rose 0.5% m/m which means that it will take longer than expected for yearly figure to go back down to 2%.
BOC Governor Macklem commented that further declines in inflation are expected as inflation is expected to fall to around 3% in the summer. Inflation is expected to go down to 2% by the end of 2024. Inflation expectations will need to come down further while services price inflation and wage growth needs to moderate and corporate pricing behavior has to normalize in order for inflation to go back down to the target. He added that they are prepared to tighten further if inflation does not continue to move to the target. He said that soft landing is possible and that weak growth is needed as demand is too strong.
Headline inflation in March declined for a second consecutive month as it came in at 3.2% y/y vs 3.3% y/y in February, however core measures prove to be much more resilient. Ex fresh food came in at 3.1% y/y same as the previous month while ex fresh food, energy increased by 3.8% y/y vs 3.5% y/y in February for a twelfth consecutive monthly increase. Core measures indicate that underlying inflationary pressures are becoming more persistent.
Preliminary April PMI data showed manufacturing improving to 49.5 from 49.2, services ticking down to 54.9 from 55 and composite at 52.5 vs 52.9 the previous month. When we dig into details we see that new orders show stronger growth, same as employment, but output and shows weaker growth. Output prices show stronger inflation while input prices show weaker inflation. Overall, there is a stronger positive outlook regarding future output.
This week we will have BOJ meeting. There will be no change to interest rate but as this is the first meeting led by new Governor Ueda we may get a surprise in change of Yield Curve Control.
Important news for JPY:
- BOJ Interest Rate Decision
SNB total sight deposits for the week ending April 14 came in at CHF544.1bn vs CHF532.2bn the previous week. SNB Maecheler stated that although inflation is coming down, rate hike in March was necessary to bring down inflation toward their 2% target. SNB Chairman Jordan acknowledged risk of correction in the housing market adding that although expectations are for inflation to decline this year there is still work to be done.