Written by Steven Dooley, Head of Market Insights, and Shier Lee Lim, Lead FX and Macro Strategist
Greenback lower ahead of CPI
The US dollar continued to slip on Tuesday – its fifth losing session out of six – ahead of tonight’s critical US inflation reading.
The March inflation report could significantly impact expectations for a Federal Reserve rate cut in June. A stronger than expected number could end chances for a June cut while a number in line or below forecasts will likely keep June rate-cut hopes alive.
According to Reuters, markets are looking for headline annual inflation to climb from 3.2% to 3.4% while core is forecast to fall from 3.8% to 3.7%.
While financial markets have continued to fret over the monthly variation in US inflation, the reality is that headline inflation has been around 3.5% for almost a year while core has been close to 4.0% for more than six months. Both numbers are well down on the highs seen in 2022 when headline topped out at 9.1% in June and core peaked at 6.6% in September.
Looking forward, US inflation looks poised for an eventual move lower with the “stickier” components of inflation, excluding shelter, trending lower. Higher housing costs – especially rent – remain the biggest risk, however.
RBNZ due
Across markets, the Aussie and kiwi led the gains, with both currencies up 0.4% ahead of today’s Reserve Bank of New Zealand decision due at 2.00pm NZST.
As it did in late February, the Reserve Bank of New Zealand looks likely to provide reasonably balanced advice and announce an unchanged cash rate of 5.50%.
Following their last meeting, food and dairy prices have dropped, GDP has contracted more than anticipated, and other major central banks have usually spoken in a more dovish manner.
But the NZD has depreciated as well, and oil costs have increased. In general, we believe that the risks are more evenly distributed, although at this point, we do not anticipate a significant shift in stance.
Before giving the argument for rate cuts more careful thought, we believe the RBNZ board will probably want to review the Q1 CPI, which is expected on 17 April, the revised staff estimates on 22 May, and the next budget on 30 May.
We expect the first 25 basis point rate cut in August, with a total of 75 basis points of easing anticipated this year. As a result, upside for the NZD/USD might be capped in the medium term.
China’s fix in focus
China policymakers remain focused on addressing issues in China’s currency market. Despite the People’s Bank of China (PBoC) maintaining its daily reference rate below 7.1000, the onshore exchange rate continued to climb, closing within the 2% trading band.
In the short-term, the USDCNH pair is poised to gain further, potentially reaching the range of 7.2400-2900.
In addition to influencing the daily reference rate to hover around 7.09-7.10 levels, authorities may have implemented other foreign exchange controls, given the decrease in onshore trading volume.
In light of mounting pressure from a robust US dollar, we anticipate that Chinese policymakers are inclined to gradually enhance exchange rate flexibility to manage the trilemma of monetary policy independence, exchange rate stability, and capital mobility, while safeguarding foreign exchange reserves.
Aussie, kiwi at highs ahead of RBNZ, CPI
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 8 – 13 April
All times AEDT
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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