USD recovers lost ground ahead of NFP on Friday

AUD/USD: Reversing losses ahead of the NFP report on Friday

The US dollar has continued to rebound overnight reversing the losses recorded on Monday. It has resulted in the dollar index rising up to a high overnight of 99.392 as it moves further above yesterday’s low of 98.583. The US dollar and short-term US yields were supported yesterday by the latest JOLTS report which has helped to dampen expectations over downside risks posed by the release of the latest nonfarm payrolls report on Friday. The report revealed that job openings unexpectedly picked up to 7,391k in April up from 7,200k in March. It followed two consecutive monthly declines for job openings. The underlying trend for job openings since last autumn has remined relatively stable when monthly increases in job openings have averaged just over 7,500k over the last the eight months. At the same time the number of job layoffs has remained relatively stable as well. After picking up in recent months, the quits rate dropped back by 0.1 percentage point to 2.0% sending an encouraging signal for slowing wage growth going forward. Overall the report did not reveal a significant weakening of labour market conditions that could encourage the Fed to bring forward plans to resume rate cuts. As a result, the US rate market continues to price in only a small probability of the Fed resuming rate cuts at upcoming FOMC meetings with only 6bps priced by July compared to 21bps for September. The release of the nonfarm payrolls report on Friday would have to be much weaker than expected to bring forward Fed rate cut expectations and drag the US dollar to fresh lows. In other news overnight, the Trump followed through on plans to double tariffs on steel & aluminium to 50% which took effect from 12.01am Washington time. We continue to expect the Fed to cut in the 2H of this year as evidence of the negative economic impact from trade disruption and heightened policy uncertainty continues to build.  

It was revealed overnight that Australia’s economy was already slowing more than expected before the recent disruption to global trade. Australia’s economy expanded by just 0.2% in Q1 representing a sharp slowdown after growth of 0.6% in Q4. It was the weakest quarter of growth since Q2 of last year. Weaker growth supports the RBA’s recent decision to lower the policy rate by 25bps in May, and casts some doubt on whether they should have been bolder and delivered a bigger 50bps cut which was discussed at the meeting. The RBA had been expecting economic growth of 0.4% in Q1 in their May Statement on Monetary Policy. Economic growth was negatively impacted by extreme weather including cyclones, heavy rainfall and flooding along parts of the east coast. The RBA will be watching closely to see if growth picks up in Q2 before switching from plans for gradual 25bps rate cuts. The Australian rate market is already well priced for wo further 25bps cuts in July and August. The developments are unlikely to prevent the AUD from rebounding further in the near-term on the back of broad US dollar weakness and an easing of fears over the scale of disruption to global growth from trade disruption. AUD/USD is currently attempting to break above resistance provided by the 200-day moving average at around 0.6440.        

CHF REMAINS STRONG CONTRIBUTING TO INFLATION UNDERSHOOT

Source: Bloomberg, Macrobond & MUFG GMR

EUR/CHF: slowing inflation in Europe is a bigger policy headache for the SNB

The releases of the latest inflation data both from the euro-zone and Switzerland both surprised to the downside yesterday providing encouragement to market participants looking for further policy easing from the ECB and SNB. Headline and core inflation in the euro-zone slowed to 1.9% and 2.3% respectively in May. The main surprise was the scale of the slowdown in services inflation to 3.2% down from 4.0% while goods inflation remained stable at 0.6%. A drop in volatile tourism-related prices helped to partly explain the slowdown in services inflation. Still the report should give the ECB more confidence that inflation will remain close to their target going forward alongside recent evidence of slowing wage growth in the euro-zone. We expect the ECB to deliver another 25bps rate cut tomorrow. While the ECB is likely to skip hiking rates in July, the softer inflation data gives us more confidence that the policy rate will be lowered to 1.50% by year end. The negative impact on the euro from the weaker euro-zone inflation data has been muted at a time when yield spreads have become a less important driver of FX markets. The euro has derived support from reports that the German government is planning additional fiscal stimulus alongside stepping up defence and public infrastructure spending. It has been reported that there are plans to pass a package of corporate tax breaks totalling EUR46 billion to spur investment. It could help Germany’s economy to offset the negative impact from trade disruption.

Slowing inflation was even more evident in Switzerland where the headline rate fell into negative territory at -0.1% in May. Energy prices and rents were the main drivers. It was the first negative reading since March 2021 prior to the global inflation shock taking hold from COVID and the Ukraine conflict. SNB Governing Board member Petra Tschudin attempted to downplay the importance of the negative print saying “this is just one data point” and that they are “focused on the  medium-term”. As a result, we still expect the SNB to still to their plan to cut the policy rate by a further 25bps to 0.00% when they meet on 19^th June. Market participants are already anticipating that the SNB may even have to return to negative rate policy at the following meeting in September if inflation continues to surprise to the downside and the Swiss franc remains strong. The other alternative would be for the SNB to intervene in the FX market to weaken the Swiss franc but could now face stronger pushback form the Trump administration. 

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com