Our Bias Remains for a stronger USD

Markets

Core bonds drifted south yesterday in the run-up to this week’s big events, starting with January PMI surveys today. Daily changes on the US yield curve ranged between -2.1 bps (2-yr) and 4.3 bps (30-yr). German yields rose by 2.5 bps (2-yr) to 7.9 bps (30-yr). The ECB’s lending survey (sharpest tightening in credit standards behind us), disappointing US (Richmond Fed Manufacturing index) and EMU (consumer confidence) data and a rather soft $60bn 2-yr Note auction had no direct market impact. Q4 corporate earnings generally beat expectations, with a stellar Netflix result being the cherry on the cake after US close. The S&P 500 yesterday succeeded a third straight record high (+0.3%). Overnight, AP rapidly called a Trump win in North Hampshire Republican primaries, beating his sole remaining contestant, Haley, by a wide margin. If it weren’t for Trump’s legal issues and the upcoming primary in her home state, South Carolina (Feb 24), she would have likely considered leaving the race. We don’t see additional signs of USD strength after Trump’s win like it was the case after the landslide victory in the Iowa race. While it’s too early to contemplate the eventual outcome of this year’s US elections, we believe that Trump and USD momentum might go hand in hand. Not specifically because of USD-positive domestic policy, but rather for a foreign policy which could be negative for the likes of EUR, CNY,…

Turning to that dollar: the greenback had a good run yesterday. EUR/USD set a new YTD/correction low at 1.0820 before closing at 1.0854. Our bias remains for a stronger USD with support levels in the pair located at 1.0793 (50% retracement on Q4 rally, but especially at 1.0712/24 (61% retracement & December low). Today’s PMI surveys are expected to show a modest bottoming out in EMU and stabilization at a slow pace in the US. Ahead of tomorrow’s ECB gathering, we don’t expect EMU readings to have big market potential. ECB Lagarde set the stage for a potential first rate cut in summer with market expectations shifting to a June kick-off. US/Fed guidance is currently less specific with market consensus centering around a May start. PMI’s are unlikely to alter this thinking.

News & Views

New Zealand inflation slowed to 0.5% Q/Q and 4.7% Y/Y in Q4 2023, down from 1.8% Q/Q and 5.6% Y/Y in Q3. The outcome was in line with expectations, but below the forecasts of the Reserve Bank of New Zealand (5% Y/Y). There is a substantial divergence between tradable goods disinflation (-0.2% Q/Q & 3% Y/Y) and stubborn price rises for non-tradeable goods (1.1% Q/Q and 5.9% Y/Y). Prices for housing and households utilities rose 0.8% Q/Q. Food prices fell 1.2% Q/Q. Price for miscellaneous goods and services rose 1.5% Q/Q. The RBNZ at its end November meeting left its policy rate unchanged at 5.5%, but felt uncomfortable with the high level of core inflation. In this respect it warned that if inflation would turn out higher than expected, it still might raise the policy rate further. Today’s data probably allow the RBNZ to maintain a wait-and-see approach. Market speculation on a May rate cut is probably premature. NZD/USD rebounded to 0.61 after a protracted decline since the start of the year.

The Japanese composite PMI rose to 51.1 from 50 in December. The rise in activity still masks a contraction in the manufacturing sector (48 from 47.9) while services activity gained further traction (52.7 from 51.5). According to the report “Forward-looking indicators from the survey suggest the potential for demand and activity to rise over the coming months”. “The rate of input price inflation remained elevated by historical standards, with the latest rise in operating expenses little changed from the marked uptick seen in December. That said, Japanese private sector firms looked to absorb some of these costs, as the rate of output charge inflation eased to the softest since February 2022.” The Japanese 10-y yield this morning adds 5 bps, but this still is a mainly a reaction to yesterday’s BOJ press conference. The yen gains modestly (USD/JPY 147.95).