FX Weekly Update – April 8th, 2024

Posted Under: Weekly updates

Another blowout jobs report out of the US put to rest any lingering doubts about the strength of the labour market there. With net new job creation much higher than expected, and a downtick in the unemployment rate, the Federal Reserve was likely relieved to see that wage growth was contained, at least in the annual
number.

Interest rate markets have, however, now priced out all the dovishness of the last Fed meeting and they assume there is a 50% chance that cuts will not come until July. The dollar didn’t benefit much from this, and it ended the week lower against most of its major counterparts. Indeed, the rally in the greenback following the very strong NFP report on Friday was very short-lived, as investors turn their attention to highly important news this week, notably the latest CPI report and FOMC meeting minutes on Wednesday.

EUR: Eurozone inflation continues to ease towards the ECB’s target, and the disinflation trend has yet to show any signs of stalling as it has in the US. Not only is the headline inflation number printing around its lowest level in three years, but the critical core figure has also dropped to a two-year low. We caution that this US inflation cycle has led the European one by about six months, but the news so far must be pleasing Governing Council members nonetheless.

Revisions to the PMI data confirmed that the economy is likely expanding modestly again. All in all, we expect the ECB to react to this positive news by keeping rates unchanged this week, but hinting strongly that it will reduce rates by 0.25% at the next meeting. President Lagarde will likely say that discussions on cuts were had at this week’s meeting, which should convince markets that the first cut is on the way in June.

GBP: Data out of the UK in the past few weeks continues to paint a picture of a recovery in economic activity, led by the services sector, and very gradual disinflation to levels that are still above Bank of England targets. Both the business activity PMI numbers and the January GDP figures suggest that expansion returned at the beginning of the year, and while the Q1 growth figures won’t be released until early-May, this Friday’s data for February may further support this hypothesis.

In the absence of any surprises in this week’s GDP data, sterling will probably trade off events in the Eurozone (the ECB meeting) and the US (the March inflation report). Bank of England member Greene will also be speaking this week. While the March communications from the MPC were on the dovish side, we think that committee members won’t be in a rush to signal looser policy ahead, with recent data suggesting that UK rate cuts are unlikely until at least June.

JPY: Speculation remains rife as to if and when Japanese authorities will intervene in the foreign exchange market in order to protect the yen. Policymakers have stepped up intervention warnings in the past few weeks, with the country’s finance minister hinting that authorities would step in to prevent what he described as ‘excessive moves’ in the exchange rate. This speculation appears to have put a temporary floor under the Japanese currency, which has traded largely sideways against the dollar since 20/03, around the 151 level.

The threat of direct FX reserves selling is only likely to protect the yen for so long, however, and a narrowing in US-Japan rate differentials will probably be needed to trigger a more significant rebound in JPY. This could either come in the form of a dovish Fed, or a hawkish BoJ. With the latter looking rather unlikely barring a blowout in Japanese inflation, yen bulls will be hoping that a miss in Wednesday’s US CPI data could be a catalyst for a JPY rally.

CAD: A disappointing labour report for March contributed to the underperformance in the Canadian dollar last week, which sold-off against all of its major peers, despite the move higher in oil prices. Contrary to the US, the Canadian labour market delivered an unexpected blow to market predictions. Net jobs contracted by 2.2k, while the unemployment rate surged to 6.1% from 5.8%.

This report provides further rationale for a dovish shift from the Bank of Canada in its upcoming remarks. The BoC will be announcing its latest rate decision on Wednesday. No change is seen this week, but given the ongoing positive developments in curbing inflation, and the soft jobs data, policymakers may prepare market for a potential cut in June. While this is now roughly 75% priced in by rate markets, there remains some modest room for CAD downside should the BoC give a strong indication that lower rates are likely at the following policy meeting.

CNY: A shorter trading week due to the Qingming Festival on Thursday and Friday brought the release of the missing business activity readings for March. Caixin PMI data did not show as significant upside surprises as the NBS data released in the previous one, but it also pointed to a recovery in both the manufacturing and service sectors. The data, however, was not enough to prevent the yuan from continuing its downward move against the US dollar, with the USD/CNY exchange rate departing further from the 7.20 mark.

Contrary to the previous one, this week’s economic calendar is quite busy. On Thursday, attention will be on inflation data, which is expected to show a second month of positive consumer price growth. On Friday, trade data for March will be out. Aside from that, in the next few days data on loans is set to be released.