Weekly outlook
USD
Following the FOMC, I am leaning towards a bearish dollar – however, this is based primarily on the banking situation. If this is resolved and is shown to be contained in a few banks with issues around risk management there may not be a credit issue. The policy expectations of both the Fed and ECB are suggesting that banks tightening credit may have the same impact as 50bps in rate hikes.
This graph is taken from this article by Nordea (which sums the situation up pretty neatly)l: https://corporate.nordea.com/articl…flation-to-financial-stability-and-back-again
As I mentioned in my previous post, I am looking for signs of confirmation of bank credit tightening:
- General Inflation data
March 31 – Core PCE Price Index m/m
April 12 – CPI
April 13 – PPI
- A slowdown in credit, both on commercial and business would signal that the banking crisis has acted as a proxy rate hike meaning no need for a fed hike.
April 7 – Consumer Credit m/m
- A slowdown in spending
March 31 – personal spending
April 3 – Construction Spending m/m
This will follow on into the next month’s releases too.
ECB:
Friday saw the flash PMIs for Germany, Spain and EUR (as a whole). Manufacturing was down vs forecast for all three whereas services were up. Overall, the composite of the two was up, but this was driven by services. Manufacturing was lower than forecast and appears to show a decrease in forward orders.
The Services PMI is a survey of managers in transport and communication, financial intermediaries, business and personal services, computing & IT and hotels and restaurants – These beat expectations, but I am going to look at whether there is a relationship between services PMI and credit conditions. My working hypothesis is as credit conditions worsen, this will negatively impact the services PMI as a lot of these new orders will be purchased with credit.
If there is a squeeze on credit and the PMI services fall, this would likely mean that both services and manufacturing will fall below 50.
Week ahead does have money supply/private loans data, but due to the lag it will not be impacted by the SVB fallout. Then towards the back end of the week, Germans and Spanish CPIs are released. This hard data is much more interesting and more immediately relevant for the interest rate decisions.
GBP
I felt it was a much more hawkish meeting from the BoE last week and subsequent comments from Bailey in the days after were skewed towards the potential for further increases.
This meeting was bookended by two important factors in the rates decision – CPI which accelerated and came in hotter than consensus; and retail sales. These sales showed the biggest rise in a year. With both spending and inflation accelerating – this could force the BoE to hike again.
The consensus was this is the last rate hike, but I don’t think it is supported in either the hard data or the rate decision voting (which remained the same and appeared pretty unchanged).
If the hard data stays hot and CPI is accelerating I cannot see why at least one additional hike wouldn’t be on the cards.
As an aside – I have just done the weekly grocery shop and something which previously was costing £60, this week put me back £85 – this is a very fresh produce weighted shop which may alleviate as the growing conditions close to home improve into spring and summer – but I cannot see food prices/inflation being under control on the ground at least for this month.
AUD/NZD/China
Consumable imports into China has fallen yet imports from resource-rich countries such as Australia, Brazil and Indonesia rebounded with Chinese demand for commodities like ores, coal, paper pulp and nickel (https://www.fitchratings.com/resear…rgy-prices-weigh-on-chinas-imports-23-03-2023) – This should strengthen the AUD relative to the NZD – with soft imports and no real chinese household spending rebound, this could weight on the NZD.
If there is a rebound in ores, coal and nickel – these are major exports for Australia.
JPY:
It seems to be a pretty quiet period in Japan – with the transition period from Kuroda to Ueda – it feels like a holding pattern.
There was the summary of market opinions released, which included “Given the outlook for economic activity and prices, the Bank needs to persistently continue with monetary easing toward achieving the price stability target”; “in the current phase, the Bank should persistently continue with large-scale monetary easing.” and “Until achievement of the price stability target of 2 percent sufficiently comes into sight, it is necessary for the Bank to continue with the current monetary easing, including yield curve control.”.
The USDJPY has slowly and quietly been unwinding the increases seen since March 22. Being honest – it’s something that I’ve been completely oblivious to and had not realised the extent of the drop and it wasn’t until I took a short break and took a step back that I realised.
The positioning (CoT report) also shows that the net positions are short JPY (not short USDJPY).
If there is a net short yen position building, if this unwinds via bullish news from Japan and bearish (think rate cuts from US) this could cause a significant move back down.
If anyone can give a bit more context on the JPY and the positioning – or interprets this differently I would really enjoy hearing it. .
CHF:
I think it is important to pay slightly more attention to the CHF – as it is still seen as a safe haven, something which may come into play in the coming months as potentially issues with the banking and economy come into play in the US and potentially the Eurozone.
It is interesting that the SNB are actively seeking to increase its currency strength via the unwinding of its short positioning vs a basket of currencies over the past few years as a way to combat inflation which it has deemed as being too high. The ING article (https://think.ing.com/snaps/snb-stands-firm-in-face-of-turbulence-50bp-rate-hike) give a quicker (and much better worded summary).
CAD
Last week the CAD saw inflation pretty much meet consensus; and retail sales were stronger than forecast.
As the BoC have already announced a rate pause, this decrease in inflation almost confirms that this pause will stick – providing next month’s CPI doesn’t show an uptick. But as the housing market cools, the petrol and energy prices come down inflation may be on the way down.
Oil prices are also falling which may weigh a bit on the CAD too. On the other side of the coin, China as Canada’s second biggest trading partner has shown increases in ores and paper imports, this could provide a bit of a boost. The same news that would help the AUD and NZD could also boost the CAD – however this would be less impactful as the main trading partner (by a LONG way) is the US. But, with external factors the CAD could potentially strengthen relative to the US should there be anything bearish from America.
