FX Daily: PBoC pushback softens the dollar bull case | articles

On Friday, we released our FX Talking monthly update for March. We rather put our necks on the line by emphasising (albeit a long-held view) that the dollar would start to turn lower in the second quarter. What did not help that release was the stronger dollar on Friday, where markets were speculating that the People’s Bank of China (PBoC) might have taken a decision for one of its episodic bouts of CNY depreciation – a move which generally carries Asian FX with it and provides support to the dollar globally. Fortunately, the PBoC has today pushed back against ideas of a CNY down-leg by delivering a stronger CNY fixing. There have also been reports of state banks selling dollars – all pointing to the view that Chinese authorities prefer a stable renminbi as it works through economic challenges at home.

The support to the renminbi has helped to limit Friday’s advance of the dollar, as has some quite aggressive verbal intervention in support of the yen from Japanese officials. Many in the market doubt Japan will intervene to sell FX at 152, with 155 seen as a more likely level. The core view here remains that it will have to be a dovish Federal Reserve and a weaker dollar that turns USD/JPY lower. A hawkish Bank of Japan (BoJ), where implied JPY yields through the forwards are still negative, is simply not enough.

Onto this week. Friday is a public holiday in many parts of the world but still features the key release of the week, the US core PCE deflator for February. There is a strong consensus behind a 0.3% month-on-month reading, which will not be good enough for the Fed’s disinflation narrative. However, this week also sees quite a few Fed speakers. We would highlight the influential Christopher Waller speaking on Wednesday and Fed Chair Jerome Powell speaking on Friday We want to hear if the Fed has more to say about faulty seasonals making early-year inflation prints look too strong, a theme introduced by Chair Powell at last week’s FOMC press conference.

A surging US stock market and the implications for US confidence and consumption make it hard to argue with the dollar right now, warning that DXY can push up to the 105.00 area. But we continue to expect this strength to be temporary and would prefer to position for a second-quarter downtrend.

Chris Turner