FX Daily: CPI Inflation Rising to Keep FX Focused on Quick Responders | Article

USD: the dollar will remain bullish before the publication of the March CPI

The dollar starts the week at its cyclical highs. This decision remains largely motivated by the surge in inflation and the fact that the Fed seems ready to deal with it with a “rapid” normalization of monetary policy. The market currently expects the Fed to raise rates by 250 basis points by the end of the year. And at ING, we expect 150 basis points of this tightening to come over the May-July period.

Interestingly, we have seen the US Treasuries curve recover over the past week. The move appears to have been largely driven by comments from Fed dove Lael Brainard and the March FOMC minutes that the Fed could start shrinking its balance sheet from May and the gradual reduction to a rate of 95 billions of dollars a month pretty quickly. US 10-year yields are now at 2.75%. With the long term driving the rate adjustment at the moment, the most closely correlated currency pair with the long term, USD/JPY, is now at the forefront of the dollar‘s advance. As we pointed out last week, we doubt Japanese FX intervention will slow the move this side of 130. And another round of dovish remarks from the Bank of Japan’s (BoJ) Kuroda confirm overnight next day that the BoJ remains on a very different page from the Fed.

By contrast, this week is also expected to see an aggressive 50bp rate hike from the Bank of Canada (BoC) and a 25bp hike from the Reserve Bank of New Zealand (RBNZ) – with both meetings taking place on Wednesday. Falling into the camp of fast-reacting central banks, BoC and RBNZ policy should continue to see the Canadian and New Zealand dollars outperform the likes of the Japanese yen and euro.

In terms of timing this week, we’ll see the March US CPI release tomorrow, March Retail Sales on Thursday, and plenty of speakers from the Fed. With a lot of uncertainty in the global economy, we think investors will be happy to hold long positions in the dollar over the upcoming Easter holiday, and we think DXY has a chance of gaining a 100 footing.

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