CPI in focus – USD selling bias points to expectations of weaker print

USD: Market lull ahead of CPI  

The US dollar has traded in a narrow trading range so far today with the US CPI data the key event later this afternoon. The only price action of note came in NZD following the RBNZ policy announcement in which rates were left unchanged but little guidance was given to validate the current market pricing of a rate cut in August. The tone of the statement was certainly more hawkish but this meeting provided no updated forecasts and hence was not going to be a key meeting for any change in guidance. NZD is the best performing G10 currency this morning but is up a mere 0.2%.

The potential for bigger market moves will come this afternoon with the consensus for a moderate slowdown in MoM CPI and core CPI from 0.4% to 0.3%. As highlighted below, the current level of the dollar versus a number of key G10 currencies relative to rate spreads suggest the dollar should be stronger. USD buying may be constrained ahead of the data and certainly any upside surprise could see some ‘catch-up’ dollar buying. After two upside surprises, a weaker print could prompt a bigger rates market reaction given the move of late. The 2-year UST note yield now at 4.75% is much better priced for the potential delay in the start of the rate cutting cycle in June. The shift in expectations (now 50-50 for June cut) has been helped by Fed officials – the latest being Atlanta Fed President Bostic who reiterated his view of one cut this year but then also added that there was a feasible scenario of that being pushed back so that there could no rate cuts at all this year.

The source if any surprises in the CPI data today will be important. Rents have been a factor this year and this has been in part down to a change in weightings within the rental measure that has seen higher prices. If any upside surprise is rent-specific today it may be viewed as more technical and hence the inflation picture beyond rents could be the real driver of the market reaction.

Following the CPI data we also have the release of the minutes from the FOMC meeting in March. While the median dot profile still signalled three cuts this year at that meeting, FOMC members did reduce their expected cuts so the minutes should provide the justification for that shift, which may provide some hawkish headlines. Still, the minutes should also indicate confidence in the disinflation trend continuing given Powell played down the CPI jump referencing “seasonality” issues.

But FX direction, possibly over the coming weeks, may well be dictated by the CPI print. We view the CPI strength in Jan/Feb as more a blip than a trend and hence see greater prospects of a better print today. But the dollar has underperformed the move in rates this week (should be stronger) which could curtail dollar selling initially on the back of a weak figure. A catch-up in dollar buying would be likely on any print north of 0.3% m/m, especially if gains are broad-based beyond just rents.

EUR/USD HOLDING FIRM DESPITE SHORT-TERM SPREAD MOVE

Source: Bloomberg, Macrobond & MUFG GMR

EUR: Tightening credit conditions could encourage ECB to cut

EUR/USD traded in a very tight range yesterday with limited reaction to the release of the ECB’s Bank Lending Survey report which in our view certainly raises the prospect of a move dovish tone to the ECB policy meeting tomorrow.

While credit standards were “broadly unchanged”, the survey revealed that loan demand from firms had declined “substantially”, which was contrary to banks’ expectations of a recovery in the last survey in January. The ECB survey also concluded that balance sheet reduction had continued to “exert tightening pressure” and that the positive impact of higher policy rates on bank profits would “diminish over the next six months”. Loan demand from firms is still not as bad as in 2023 (-43 in Q3 2023) but the drop from -20 in Q1 2024 to -28 in Q2 still leaves the level of demand at close to the worst point in 2012 during the euro-zone debt crisis.

The fact that the ECB intends to pick up the pace of balance sheet shrinkage from July with PEPP securities being allowed to mature without reinvestments, it will only reinforce the prospect of the ECB looking to the short-term interest rate as a means for helping ease tightening credit conditions.

The overall message was that there was no alarming change in credit conditions and the pace of decline in the demand and supply of credit continued to slow. Nonetheless, with TLTROs maturing fully by year-end and with PEPP roll-offs commencing into a market where demand for loans has “declined substantially”, the overall BLS will certainly give the ECB additional confidence over the justification for cutting rates in June. ECB Chief Economist Philip Lane and President Lagarde have both cited the importance of the BLS in deciding the appropriateness of the policy stance.

Looking at EUR/USD and the 2-year EU-US swap spread since covid struck in 2020, we now have the widest divergence to the downside that we have seen since late 2021 into Q1 2022 when the global inflation shock took hold and Russia invaded Ukraine. EUR/USD should currently be trading below 1.0500 covering that period based on the 2yr swap spread. Of course that divergence in 2022 did ultimately result in EUR/USD spot following the spread to the downside and certainly if this spread continues now to move in favour of US yields, the risks will increase of a bigger EUR/USD move to the downside. In that sense the CPI print today is important but how forceful the ECB chose to communicate a possible rate cut in June will also be important. The market response to the US CPI data today may shape to some degree the tone from Lagarde tomorrow, especially if EUR/USD was to take a tumble today on the back of a strong US inflation print.

ECB BLS – LOAN DEMAND FROM FIRMS FELL AGAIN DESPITE PRIOR EXPECTATIONS OF A PICK-UP

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
CH	09:00	Chinese Total Social Financing	--	4,700.0B	1,560.0B	!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-0.6%	!
US	13:30	Core CPI (YoY)	Mar	3.7%	3.8%	!!!
US	13:30	Core CPI (MoM)	Mar	0.3%	0.4%	!!!!!
US	13:30	CPI (MoM)	Mar	0.3%	0.4%	!!!!!
US	13:30	CPI (YoY)	Mar	3.4%	3.2%	!!!
CA	13:30	Building Permits (MoM)	Feb	-4.3%	13.5%	!!
US	13:45	FOMC Member Bowman Speaks	--	--	--	!!
CA	14:45	BoC Monetary Policy Report	--	--	--	!!!
CA	14:45	BoC Rate Statement	--	--	--	!!!!
CA	14:45	BoC Interest Rate Decision	--	5.00%	5.00%	!!!
US	15:00	Wholesale Inventories (MoM)	Feb	0.5%	-0.3%	!
CA	15:30	BOC Press Conference	--	--	--	!!!
US	17:45	Fed Goolsbee Speaks	--	--	--	!!
US	17:45	FOMC Member Barkin Speaks	--	--	--	!
US	18:00	10-Year Note Auction	--	--	4.166%	!!
US	19:00	FOMC Meeting Minutes	--	--	--	!!!

 

Source: Bloomberg