USD continues to trade close to YTD lows ahead of US CPI report

USD: NFP report and Loan Officer survey fail to provide fresh trigger for sell-off

The US dollar has continued to consolidate at weaker levels at the start of this week with the dollar index trading just above the year to date low of 100.79 from 14th April. The US dollar has failed to derive much support from the pick-up in US yields since late last week. The 2-year US Treasury yield has climbed back up to 4.00% after hitting an intra-day low last week at 3.65%. The US rate market remains reluctant though to price in further rate hikes from the Fed, and is currently discounting only around 2bps of additional hikes by the June FOMC meeting. In contrast, the US rate market remains much more confident that the Fed will have to reverse course and deliver rate cuts by the end of this year. There are currently around -68bps of cuts priced in by the end of this year. The dovish outlook for Fed policy has not been altered significantly by the release of the stronger non-farm payrolls report on Friday and the latest Fed Senior Loan Officer survey. The non-farm payrolls report provided further evidence that employment growth is slowing but not as fast as had been feared. Over the last three months, employment growth has slowed to an average of 222k per month compared to 524k per month a year ago. However, it remains sufficiently strong enough to ease fears that an even sharper slowdown/recession is already underway in the US. At the same time, the non-farm payrolls report revealed more robust average hourly earnings growth that increased by 0.5% in April. At the current juncture, we would view the stronger print as more of a one off with underlying trend growth running at around 0.3%/M on average over the last 3-6 months. Overall, the data highlights that it is not yet a done deal that the Fed will not raise rates further although we agree with market pricing that there is a higher hurdle now especially with the upcoming US debt ceiling stand-off posing a risk to financial stability ahead of the next FOMC meeting on 14th June. President Biden is scheduled to meet Congressional leaders later today to discuss extending the debt ceiling.

The Fed released their latest Senior Loan Officer Opinion Survey on Bank Lending Practices overnight. The survey has understandably attracted more attention than normal in light of the recent loss of confidence in US regional banks and fears amongst market participants that it will result in a significant tightening in credit conditions going forward that weighs more heavily on growth. The survey addressed changes in standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally correspond to the Q1. The respondent banks received the survey on 27th March and responses were due by 7th April. It covers the period just after the collapse on Silicon Valley Bank on 10th March. It revealed that the proportion of US banks tightening terms on loans for medium and large businesses rose to 46% in Q1 up from 44.8% in Q4 2022, and modestly higher at around 48% for small firms. The report also showed much weaker demand for credit. The proportion of banks reporting stronger demand for commercial and industrial loans dropped by 55.6% in Q1 which was the sharpest decline since 2009 during the Global Financial Crisis. There has been some initial relief though that the survey results could have been even worse. The next important US data release in the week ahead will be the latest US CPI report for April that is released tomorrow. In these circumstances, we remain comfortable to maintain short US dollar positioning even though the NFP report and Loan Officer survey failed to trigger a further sell-off.

US BANKS TIGHTENING CREDIT STANDARDS

Source: Bloomberg, Macrobond & MUFG GMR

NOK: Rebounding alongside other commodity FX after Norges Bank meeting

The commodity-related G10 currencies have been the best performers so far this month. The NZD (+2.5% vs. USD), the AUD (+2.4%) and CAD (+1.3%) have all rebounded following last month’s sell-off. The NOK has finally staged a strong rebound as well since late last week. It has resulted in USD/NOK falling from an intra-day high of 11.949 on 3^rd May to  an intra-day low yesterday of 11.543. In our latest FX Weekly report (click here), we highlighted that krone weakness was becoming more extreme.   The sharp correction lower in energy prices since last summer has been contributing to NOK weakness. The downward trend for the price of oil has resumed in recent weeks as the price of Brent has given back all of the initial gains triggered by the OPEC+ production cut announcement at the start of April, and has fallen back to the year to date low close to USD70/barrel. The bearish price action continues to cast doubt on the strength of global growth at the start of this year. Looking back at previous periods of more acute NOK weakness they mainly occurred  when the global economy slowed sharply. Over the last thirty years there have been four occasions when the trade-weighted NOK has fallen by around 15% or greater on an annual basis: i) in January 2009 at the peak of Global Financial Crisis, ii) in September 2015 when the price of oil collapsed by around 75% in response to the positive supply shock from US shale oil production, iii) in March 2020 when global demand collapsed during the initial outbreak of COVID, and iv) in April of this year. On this occasion though the global demand or supply shocks are not as severe yet krone weakness is still as extreme.                   

The disconnect between NOK weakness and economic fundamentals was highlighted by the Norges Bank at last week’s policy meeting. It prompted the Norges Bank to send a hawkish signal that “if the NOK remains weaker than projected …, a higher policy rate than envisaged earlier may be needed”. The Norges Bank is currently planning to hike rates further by 25bps in June to 3.50%. Similarly, SEK weakness earlier this year put pressure on the Riksbank to adopt a more hawkish policy stance in February when they explicitly encouraged a stronger SEK. The Riksbank’s increased sensitivity to SEK weakness has at least helped to stabilize it at weaker levels in recent months. It will provide some reassurance to the Norges Bank alongside past history showing that the NOK has rebounded strongly in the years following such sharp sell-offs (TWI NOK +15.5%Y/Y to 12/01/2010, +6.1% to 28/09/2016, and +17.3% to 23/03/2021).  In these circumstances, we continue to believe that the NOK is deeply undervalued and will rebound in the year ahead although attempting to time the turning point recently has been like trying to catch a falling knife.      

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	ECB's Lane Speaks	--	--	--	!!
US	11:00	NFIB Small Business Optimism	Apr	89.6	90.1	!
US	13:30	Fed Governor Jefferson Speaks	--	--	--	!
US	13:55	Redbook (YoY)	--	--	1.3%	!
US	15:00	IBD/TIPP Economic Optimism	--	48.2	47.4	!
US	17:05	FOMC Member Williams Speaks	--	--	--	!!
EC	18:00	ECB's Schnabel Speaks	--	--	--	!!

Source: Bloomberg