FX Daily: No clear conviction in any worry

DXY and components taking bad news in stride.
Group Research, Philip Wee03 May 2023
    Photo credit: Unsplash Photo

    DXY eased 0.2% to 101.9, still stuck in the middle of April’s 101-103 range. Similarly, EUR/USD has not deviated far from 1.10, the centre of its three-week range between 1.09 and 1.11. GBP/USD failed thrice over the past month to break above 1.25 but also found support in the 1.23-1.24 region. USD/CHF consolidated between 0.8850 and 0.90 since mid-April. Although the European Central Bank, Bank of England, and Swiss National Banks are expected to hike after the Fed today, the US has successfully brought most of its inflation gauges below its policy rate. The IMF’s latest growth forecasts see the US economy topping the advanced economies again. Markets expect most central banks to pause by June and see the Fed having the highest policy rate against its G7 peers, in nominal and real terms.

    Investors could not shake off fears of a banking crisis after First Republic Bank became the third US bank failure after Silicon Valley Bank and Signature Bank. The S&P Regional Banking ETF lost 8.9% of its value in the first two sessions of May to 38.86. Apart from closing below 40 for the first time since October 2020, the index is closer to its Covid-19 low of 27.26 on in March 2020. The Dow, S&P 500, and Nasdaq Composite Indices plunged 1.1%, 1.2%, and 1.1%, respectively. Unlike the regional banking ETF, the Dow, S&P, and Nasdaq gave back only 17%, 27%, and 43% of their 2020-2021 Covid-19 rally, respectively. However, banking worries are not confined to the US alone. The ECB’s Bank Lending Survey highlighted a substantial tightening in cred standards by Eurozone banks. Despite the surprise jump in the EU CPI estimate to 7% YoY in April from 6.9% in June, consensus expects the ECB to dial down its hike to 25 bps (its first “small” hike for the hiking cycle) at tomorrow’s governing council meeting.

    Others worry the Fed tightening could tip the US economy into a recession. A group of Democratic senators to ask the Fed to refrain from hiking today to protect jobs and small businesses. At today’s FOMC meeting, we expect the Fed to deliver a third 25 bps hike and hold the Fed Funds Rate at 5-5.25% for the rest of 2023. To maintain its commitment to bring inflation back to its 2% target, the Fed will likely emphasize that future decisions will be data-dependent. The surprise hike by the Reserve Bank of Australia yesterday (after it held rates unchanged in March) was a reminder that any pause in the hiking cycle would likely be a hawkish one. The US Treasury 2Y and 10Y yields eased 17.9 bps and 14.4 bps to 3.96% and 3.42%, respectively. The 10Y yield fluctuated between 3.25% and 3.65% since Silicon Valley Bank’s failure.

    We expect the debt ceiling debate to emerge during the post-FOMC press conference. During his semi-annual congressional testimonies last month, Fed Chair Jerome Powell told lawmakers that failure to lift the USD31.4 trillion national debt limit could lead to adverse and long-standing damage. The Congressional Budget Office confirmed that tax receipts through April had been less than estimated. It affirmed US Treasury Secretary Janet Yellen’s assessment that the US government would run out of funds by 1 June to pay its bills without an increase in the debt ceiling. The Republican Senate and House leaders have accepted US President Joe Biden’s invitation to meet on 9 May to discuss the issue. So far, markets reflected the US default risk mainly through a widening in the US credit default swap to 72 bps (its widest since March 2009) from 33 bps at the end of February.

    Friday’s US monthly jobs report will be important. Although US JOLTS jobs openings fell a third month by 3.9% to 9590k in March (its lowest level since April 2021), they were last quarter’s numbers. Nonfarm payrolls could surprise as they did every month this year. Consensus sees NFP to drop to 180k in April from 236k in March, closer to the 148k expected (vs 145k in the previous month) in today’s ADP Employment Survey. We noted the rebound in the ISM Manufacturing PMI employment index to 50.2 in April from 46.9 in March and will be watching out for a similar bounce in today’s ISM Services PMI employment index, last at 51.3 in March.

    Quote of the day
    “The cynic knows the price of everything and the value of nothing.”
         Oscar Wilde

    3 May in history
    In 2001, the US lost its seat on the UN Human Rights Commission for the first time since the commission was formed in 1947.

    Philip Wee

    Senior FX Strategist - G3 & Asia

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