Stars Aligned for Dollar Yesterday, But Greenback Succumbed

Markets

German Bunds opened softer yesterday in a catch-up move with the US Treasury sell-off on (Easter) Monday. Selling pressure remained until the start of US trading despite lower-than-expected German CPI data and a slight fall in short-term (1-yr) inflation expectations in an ECB Survey. Both cement the case for a (discounted) June ECB rate cut. Sluggish growth and disinflation momentum create a window of opportunity for the ECB, but it risks closing rapidly as we believe that the Fed will err on the side of “higher for longer” at least until after the Summer break while European inflation dynamics (Y/Y) will accelerate again in H2. Therefore we think that EMU money markets are still positioned too aggressively when it comes to making monetary policy even less restrictive after June (leaning to a cumulative 100 bps of rate cuts this year). Rising oil prices initially extended the Bund sell-off with Brent crude rising to $89/b for the first time since end October. Dynamics changed in the run-up to the US opening bell with US equity futures sinking after a significant decline in Tesla sales volumes. A few hours earlier, BYD delivered a similar message. The move pulled European equity benchmarks from small gains to closing losses in the direction of 1%. Key US markets opened with similar losses and hovered around opening levels for much of the remaining session. This bout of risk aversion helped core bonds off intraday lows and outweighed US JOLTS job openings (stable at 8.75mn). Daily changes on the German yield curve (compared with Thursday’s close) yesterday ranged between -1 bp (2-yr) and +12.3 bps (30-yr). US yields fluctuated between -1.6 bps (2-yr) and +4.7 bps (30-yr). Stars aligned for the dollar yesterday (stock & bond sell off; higher oil prices), but the greenback succumbed. The dollar failed to cling to Monday’s post-ISM gains. The trade-weighted dollar (DXY) threw the towel after failing to break 105 resistance (YTD high). EUR/USD set a new short term low at 1.0725, without testing the 1.0695 YTD low.

Asian risk sentiment is negative this morning with similar losses to 1% and slightly more. The Taiwan earthquake had only a minor additional effect. The eco calendar contains EMU CPI numbers (risks for lower outcome) and US ADP employment & services ISM. The latter will be pivotal for trading with US rates and USD still close to resistance levels. Fed Chair Powell speaks on the economic outlook after European close in what’s today’s final potential game changer. Will he stick with the balanced approach after the March policy decision (giving equal weight to a weakening labour market & disinflation) in determining the right timing of making policy less restrictive?

News & Views

Minutes of the March CNB meeting confirmed that price stability in the country had been restored, allowing the central bank to continue reducing rates cautiously. To maintain inflation at the target level, it is necessary to keep policy tight until core inflation is fully under control. A cautious approach allows the CNB to interrupt or halt the policy decline in rates at restrictive levels if necessary. Governor Michl assesses that the neutral policy rate is higher than in the past. Risks remain modestly inflationary, including a slower decline in still elevated inflation expectations. Given a tight labour market, this can translate into stronger wage demands. The recent deeper than expected decline in headline inflation was mainly due to lower food prices. Some members see the continuing rise in services prices as a ground for caution. MPC members are mixed on the CZK-weakening of late. Jan Kubicek indicated that the FX rate is fostering monetary policy easing for the first time since quite some time. Eva Zamrazoliva on the other hand didn’t see current FX level as a significant risk to meeting the inflation target longer term. A majority continues to favour 50 bps rate cut steps due to upside inflation risks. Jan Frait and Tomas Holub dissented (75 bps).

The Chinese Caixin services PMI rose from 52.5 to 52.7 in March. The pace of activity accelerated as new business rose at the quickest pace year to date. Business confidence also improved further, but this wasn’t able to avoid an ongoing contraction employment. Input cost inflation in the sector slowed and this also filtered through into selling prices. The above-50 reading marked the 15^th consecutive monthly expansion. Still the level of expansion remains below the longer run average. Combined with a further expansion in the manufacturing sector (51.1), the gain in the services sector also raised the composite index from 52.5 to 52.7.