Dollar and US Rates Stabilize

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  • The dollar is starting to get some limited traction as US rates stabilize
  • German state and national CPI readings for March will be reported today
  • ECB officials are pushing back against the market’s hawkish interpretation of March statement
  • Czech and South African central banks are expected to keep policy unchanged
  • Brazil central bank releases its quarterly inflation report 

The dollar is mostly firmer against the majors during Asian trading. Sterling and the dollar bloc are outperforming, while the yen and Scandies are underperforming. EM currencies are mostly softer. TRY and MYR are outperforming, while KRW and THB are underperforming. MSCI Asia Pacific is down 0.4%, with the Nikkei falling 0.5%. MSCI EM is down 0.4%, with China shares falling 1%. S&P futures are pointing to a lower open. The 10-year UST yield is up 2 bp at 2.39%. Commodity prices are mixed, with oil up 0.3%, copper down 0.4%, and gold down 0.3%.

The dollar is starting to get some limited traction as US rates stabilize. The US 2-year yield is hovering just below 1.30%, while the spread to Germany has moved back above 200 bp after a brief period below. Yesterday, Rosengren (non-voter in 2017) made a case for four hikes this year, which echoed Williams’ case for three hikes or more this year.  

During the North American session, the US reports another revision to Q4 GDP and weekly jobless claims. The Fed’s Mester (non-voter in 2017), Kaplan (voter), Williams (non-voter), and Dudley (voter) speak today. We would expect today’s Fed comments to line up with the more hawkish take presented yesterday.

German state and national CPI readings for March will be reported. Consensus sees a slight easing in the national y/y rate to 0.4% from 0.6% in February. Eurozone CPI will be reported Friday, with consensus for headline CPI at 1.8% y/y vs. 2.0% in February. If so, this would push back against notions that the ECB is nearing an end to its easy money policy.

Indeed, ECB officials did just that yesterday. Reuters story quoted several unidentified officials as saying the March statement was over-interpreted by the markets, and that the ECB isn’t about to end its extraordinary policies to support the economy. The next policy meeting is April 27, and we’d expect Draghi to assert a more dovish (less hawkish?) stance then.

The dollar has clawed back about half of its post-FOMC losses against the euro. A break of the $1.0720 area is needed to set up a test of the March 15 low near $1.06. The yen has held up better, with dollar/yen recouping only about a quarter of its post-FOMC losses.

Sterling is trading heavily after the expected Article 50 trigger yesterday. Leaders from the EU and the UK won’t actually meet on Brexit until April 29. Continued uncertainty is typically not good for a currency, and so we see downside risks ahead for sterling.

Czech central bank is expected to keep policy unchanged. The debate continues over when the bank will actually exit the koruna cap. Today’s meeting seems too soon, but May 4 and June 29 should be seen as very “live.” Forward guidance today will be very important.

Brazil central bank releases its quarterly inflation report. Mid-March IPCA inflation rose 4.73% y/y, the lowest since September 2010. Markets are looking for a 100 bp cut to 11.25% when COPOM meets April 12. Brazil also reports central government budget data today, to be followed by consolidated budget data Friday.

South African Reserve Bank is expected to keep rates steady at 7.0%. Before the decision, South Africa will report February PPI, money and loan data. The bank’s decision has been complicated by political developments this week. Although press reports suggest senior ANC officials oppose Zuma’s plan to fire Gordhan, the damage has been done. The weak rand will likely feed into higher inflation and may eventually need a policy response from the SARB, but the economy remains weak.