Market Brief: Fedspeak Propels Dollar Higher
Treasury yields and the dollar jumped by the most in a week during yesterday’s session when Minneapolis Fed President Neel Kashkari said he expected the central bank to keep rates elevated for an “extended period of time” as it waits for price growth to slow on a sustained basis. Speaking at the Milken Institute Global Conference, he warned “If inflation starts to tick back down or we saw some marked weakening in the labour market then that might cause us to cut back on interest rates’” but “If we get convinced eventually that inflation is embedded or entrenched now at 3 percent and that we need to go higher, we would do that”.
Two-year yields are again drifting toward the 4.85-percent mark, the greenback is trading on a firmer footing, and the other majors are caught in a sea of red ahead of the North American equity market open.
But we’re not convinced Kashkari’s words should have a lasting impact on market pricing - he has reversed position on the rate trajectory several times in recent years, and will not become a voting member of the Fed’s rate-setting committee again until 2026. We’re reminded of the role former St. Louis Fed President James Bullard played in generating market volatility long after sitting on the Open Market Committee, and we suspect the softer-dollar trend might reassert itself ahead of next week’s consumer inflation report - which could show both headline and core price growth measures easing on a year-over-year basis.
Traders are getting more than 155 yen per dollar again this morning even after Bank of Japan Governor Ueda’s latest attempt at jawboning the currency higher. “Foreign exchange rates have a significant impact on the economy and inflation,” he said in a parliamentary question and answer session last night. “Depending on those moves, a monetary policy response might be needed”. The impact of last week’s intervention effort is fading, rate differentials remain firmly tilted against the currency, and the country’s trade deficit is widening as energy prices stay elevated.
No one doubts the Japanese government’s capacity for temporarily squeezing short-sellers out of the market, but the forces arrayed against the exchange rate look likely to drag it lower until US rate expectations fall, or the traditional trigger for rapid upward moves in the yen - a shock to the global financial system - unfolds. We think another touch of the 160 threshold looks achievable in the coming months as long as markets avoid moving too aggressively - a repeat of last week’s disorderly decline could easily prompt more intervention.
The renminbi is drifting lower once again, but a rally in Chinese stocks is helping limit losses. Onshore share prices have moved roughly 12 percent higher in the last three weeks as glimmerings of fiscal and monetary support from the government intersect with ongoing buying by the “national team” of financial institutions, and an improving outlook is translating into stronger demand from foreign investors, with several of the world’s largest securities firms upgrading their forecasts in recent days. The Chinese economy remains deeply unbalanced, but fears of a 2015-style devaluation in the yuan look overblown, with officials having clear incentives to maintain stability - even as the yen depreciates and enhances Japan’s relative export competitiveness.
The pound is coming under pressure in the run-up to tomorrow’s Bank of England meeting. With traders responding to more dovish signals from the Fed in assigning near 90-percent odds to a British rate cut by August - and pricing in an additional move by year end - the exchange rate has drifted toward the 1.25 mark while the bar to a potential disappointment has fallen in recent days. We still think Swati Dhingra’s resolutely-accommodative position will gain additional adherents, but there are now good reasons to suspect that a more cautious-than-expected statement could see the currency retrace higher in the minutes after the decision.
Mexico’s central bank is likely to keep rates unchanged tomorrow afternoon, and policymakers are widely expected to maintain an easing bias, telegraphing further rate cuts in the months ahead. The peso - which has been gaining since suffering a selloff in mid-April - could come under renewed selling pressure. Yet with headline price growth running well above target and services costs accelerating as the government spends its way into the June presidential election, we think officials will sound surprisingly cautious, pointing to upside inflation risks even as they set out a conditional path for lower rates ahead.
With little in the way of other economic data releases landing this week, Friday’s Canadian jobs report could assume outsized importance in driving the exchange rate. Consensus forecasts are pointing to a 20,000-role rebound after a 2,200-job loss in March, with the unemployment rate moving up to 6.2 percent from 6.1 percent as labour force growth continues to outpace job gains. If the print comes in substantially below expectations, the loonie could weaken, but something stronger - particularly if paired with an acceleration in wage growth - could see the exchange rate gain on fading hopes for rate cuts from the Bank of Canada.
Note: Apologies for the intermittent distribution in recent weeks - a hectic and unpredictable travel schedule has played havoc with my writing cadence. Regular programming should now resume.
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