FX Daily: Dollar In Demand Others Left To Hike, Intervene, Tighten Controls

(MENAFN- ING) USD: All military options on the table keep $ bid

There was no single stand-out piece of news over the weekend, although the Houthis entering the fray will raise concerns over global supply chains as well as an escalation in the military conflict. The dollar remains bid and trading partners, whose currencies are under pressure, are looking at a range of options to resist this currency depreciation. The Indian rupee has had a decent rally today after local authorities introduced a $100m cap on onshore position sizes for local banks. This followed the Reserve Bank of India reportedly spending $30bn this month defending the rupee. FX intervention is still ongoing for many, as is the consideration of tighter monetary policy.

What stood out to us overnight was the release of a hawkish set of Bank of Japan minutes from the 18-19 March policy meeting. These minutes were scattered with references to monetary policy 'falling behind the curve', and being way below neutral. There was also some debate over the size of forthcoming rate hikes. Could a 50bp hike be a possibility? Wednesday's release of the 1Q Tankan survey may firm up expectations for a 25bp hike in April – which is now only 70% priced.

We are also keeping our eye on the dollar cross currency basis swap for any signs of tightening in dollar funding conditions. The short-dated EUR/USD measure has been widening a little and any sharper moves here would likely go hand-in-hand with a stronger dollar and more broad-based pressure on risk assets.

In terms of the US data this week, the focus will be on the labour market. JOLTS job opening data, ADP and then the March payroll report are released. Friday's NFP release, with consensus at +60k for job growth and a 4.4% unemployment rate, should leave the market minded to price Federal Reserve tightening this year in response to the energy shock. Any surprise weakness could hit the dollar.

DXY is again trading above 100 and another test of resistance at 100.25/50 looks likely this week. Barring any clear, conciliatory messages from the Iranian side, it is hard to see the dollar handing back this month's gains anytime soon. Also today, look out for any comments from Fed Chair Jerome Powell from 4:30pm CET today as he takes part in a moderated discussion at a Harvard event.

Chris Turner

EUR: ECB seems to be shying away from an April hike

Narrower rate differentials between the eurozone and the US have been providing a little support to EUR/USD in a very offered environment. Yet a 30 April 25bp rate hike from the European Central Bank is far from a given. Its pricing has recently dropped from 85% to 50% in part because of ECB commentary. On Friday, the ECB's Isabal Schnabel said the ECB should not rush its response to developments, nor overreact. These comments could leave EUR/USD a little vulnerable to any further rise in energy prices and effectively a decline in real interest rates as inflation expectations pick up.

On balance, we see EUR/USD staying offered with risk down to the 1.1440/70 area.

On the calendar today is March CPI data for Germany and eurozone confidence data. The former is expected to pick up to 2.9% year-on-year from 2.0%. Any upside surprise could lift eurozone swap rates and the euro on the view that the ECB may need to deliver some early tightening after all.

Chris Turner

CEE: First inflation figures will show the impact of higher global energy prices

Geopolitical headlines over the weekend suggest an opening of markets into a risk-off mood in the CEE region and further pressure on the pricing of central bank rate hikes. At the end of last week, we ended up pricing around three 25bp rate hikes on average over the one-year horizon in the CEE region, just slightly below recent highs. We can expect the market view to be tested again with higher oil prices at the opening, supporting further curve flattening and FX pressure across the CEE region in our view.

The calendar offers the release of the first inflation data affected by higher global energy prices in March. On Tuesday we will see the numbers from Poland, where we expect a spike from 2.1% to 3.5% YoY, above market expectations, and back to levels from mid-year last year. Higher inflation here comes after the government announced on Friday a cut in VAT on fuel in an attempt to reduce the impact on consumers, which should help in April. Similarly, in the Czech Republic, the government will decide today on measures to protect households from higher prices, where fixing margins seems like the most likely tool on the table at the moment.

On Wednesday, the CEE PMI for March will be released, which should not yet be fully affected by the US-Iran conflict – but the risk is clearly down here compared to market expectations. On Thursday, inflation figures will be released in Turkey, where we expect a slowdown from 3.0% to 2.2% month--on-month, but still a higher reading than before the fuel shock, resulting in an increase from 31.5% to 32.2% YoY.

Frantisek Taborsky

CNY: PBoC keeps things stable

As has often been the case during global crises, the People's Bank of China is again keeping USD/CNY relatively flat – this time near 6.90. For a change, its control of the currency is welcomed by the international investor community, with the renminbi avoiding the aggressive drawdowns seen by many other currencies during this crisis. The renminbi is not just up 3.5% against the likes of the Indian rupee this month. It is also up 2% against the yen and the euro as well.

This control of the renminbi reflects the local desire to position the renminbi as a long-term store of value that is consistent with the renminbi's global reserve currency status. We would not be surprised to see USD/CNY continuing to trade near 6.90 throughout this conflict.

Chris Turner

MENAFN30032026000222011065ID1110916978