Commodity-dependent currencies rally, as oil prices jump to multi-month highs.
USD retraces gains despite very strong US payrolls report for March.
ECB to hint at first interest rate cut in June after soft inflation figures. RBNZ and BoC to stand pat.
JPY hold its own as markets eye direct FX intervention.
The US dollar had a surprisingly muted response to the blowout March jobs report.
Instead, most of the action happened in commodity currencies, like the Norwegian krone, the Australian dollar, and most major Latin American currencies, that continued to power ahead on the back of soaring commodity prices, particularly oil. Investor sentiment is turning positive as economic news out of China and the Eurozone starts to show improvement, but the resulting delay in expectations for rate cuts is holding off further gains in risk assets, save for commodities and currencies of commodity-exporting countries.
Two events will vie for traders’ attention this week. On Wednesday, we get possibly the most market-moving macroeconomic release in the world, the US CPI inflation report for March. The ECB will then hold its April meeting on Thursday. As for the former, the monthly print, particularly in the core subindex, will be key, and even a 0.1% deviation from the expected number could move markets. The ECB is universally expected to leave rates unchanged, although it is likely to signal that a cut will come at its next meeting in June, and we see no reason to disagree on either point.
USD
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.