We remain negative on the USD and see dips as opportunity to reload EUR/USD longs
How the song has changed – just weeks ago, the dollar was dead. Now analysts are scrambling over each other to make lower calls: major US banks are predicting 1.16 euros near term. Stronger growth and quicker inflation has sent interest rates up, generating speculation that the Fed will speed up tightening. Plus, President Trump’s successes internationally in China and Korea are helping. The US Federal Reserve is very likely to raise rates again in June meeting, and we see the probability of additional hikes above the current 2.50%. However, we suspect that yields’ differentials have shifted so much as to redefine FX pricing. Prior to the break of 2.90% in US 10-year treasuries, currency sensitivities to yields changes were non-existent. Carry trading was extremely unprofitable. Now that USD bears have been squeezed out, further USD strength will depend on deeper weakness in Europe and Asian on a relative value standpoint.
Evidence that the US late-stage economic acceleration goes unabated will be today’s US payroll report. After a soft March, April’s non-farm payrolls is likely to rebound. The real focus will be on wage growth: average hourly earnings is expected to have risen 0.2%, putting the annual rate to a solid 2.7%.
Turkey struggles to contain inflation
As the USD/TRY continues to depreciate, rising by 5.55% since last week, we see no reason to turn the trend. Currently at 4.2668, the pair is headed to 4.2830 short-term. Lira dumping will continue.
Financial market volatility and ongoing trade disputes between US and China are not welcomed by emerging economies who suffer from continuous currency depreciation. Facing a slowdown in April economic confidence due to less optimistic business conditions, the Turkish economy slackened amid swelling inflation. April headline and core consumer price indexes are estimated at 10.85% and 12.24% annually (prior: 10.23% and 11.44%), due to increases in transport, clothing and furnishing while the impact of food and oil imports remained low. The Central Bank of Turkey (TCB) has yet to deliver a clear, determined money tightening to the market.
