FOREX: Every Which Way But Directional
As indicated by the Dollar Index (DXY), the US dollar has regained its strength, reaching the highs seen on Monday. Short-term yields remain relatively stable amidst ongoing economic data releases in the US. However, recent data has not provided convincing evidence of a significant slowdown in economic growth, which contrasts with the extent of monetary easing currently priced into the market and guided by the Federal Open Market Committee (FOMC) through the median dot profile.
However, the recent consumer confidence data suggests a concerning trend in consumer expectations and hints at selling the dollar. The index's expectations component, which provides insights into potential consumption patterns in the future, has declined for the third consecutive month. This decline is noteworthy, especially considering the simultaneous drop in job prospects and income expectations. Such indicators point to a potential slowdown in the US economy, reinforcing the need for continued monitoring of economic data to assess the growth trajectory.
The yo-yo FX effect suggests that markets are currently experiencing uncertainty regarding direction, particularly in relation to Fed pricing. Expectations for the June meeting are not anticipated to change significantly this week unless there is a surprise in Friday’s PCE data. Currently, approximately 19 basis points are priced in for June and 78 basis points by year-end, which aligns closely with the March median dot plot. Quarter-end flows may introduce some volatility in the FX market today, but overall, the dollar appears more inclined to stabilize.
According to our model, however, there is an indication that the dollar will be sold at the WMR Fix on Friday. We also expect some JPY fiscal year-end repatriation flows to limit JPY's weakness. But as I told my trading colleague this morning, the former Head of FX at BNS in Tokyo, markets don’t seem to work in historical patterns these days.
The Swiss franc (CHF) has been experiencing significant underperformance, partly due to the dovish stance of the Swiss National Bank (SNB), which no longer actively targets a stronger CHF. This lack of intervention by the SNB has added pressure on the currency. However, it may be premature to anticipate a bottom for the CHF at this point.
In the case of USD/JPY, the currency pair touched 152 after the Tokyo Fix. This movement could indicate that traders were testing Japan's tolerance for foreign exchange (FX) intervention. However, it's important to note that any intervention from Japanese authorities is likely to be verbal in nature initially rather than actual market intervention. Traders are mindful of this, and it's widely expected that a further upward movement in USD/JPY, possibly closer to 155, would be necessary for Japan to consider deploying FX intervention measures. It's worth remembering that Japanese authorities typically focus more on the rate of change in currency values rather than absolute levels.