USD: Correlations Breaking Down
The BBDXY range on Friday night was 1229.76 - 1243.64. We got to fresh lows of 1229.31 in recent dealings, but sit slightly higher now, last near 1231.0 (still off 0.25% for the session so far). Momentum looks firmly against the USD, as focus remains on rotation out of US assets, although US equity futures are higher in the first part Monday trade.
- EUR/USD had been trading very closely with the EU-US 10 year rate differential, but this relationship broke down completely last week.
- Traders are looking to increase their exposure to assets outside the US with nearly two-thirds of respondents to the latest MLIV Pulse survey (per BBG) saying they would seek investments in Europe. With nearly a third looking towards Asia.
- These long USD positions built up over the last 10/15 years due to US exceptionalism are only just starting to be pared back. Institutions who are now reacting to this paradigm potentially ending could take months to reduce these positions/exposure. USD sellers on bounces may be expected if this view becomes more entrenched.
- The FT also noted the number of people travelling from Europe to the US in recent weeks has plummeted by as much as 35% as travelers have cancelled plans in response to Trump's policies. This adds near term downside risks to US GDP growth.
- A weaker USD may also part of the policy playbook. Per our policy team: The United States will be looking to see if other countries will be willing to include commitments not to lower the value of their currency relative to the dollar as part of various trade negotiations, U.S. Trade Representative Jamieson Greer said Sunday. (see this link).
- Technical wise for the BBDXY index, we aren't too far away from late Sep lows sub 1220. A break below this level could see support near 1200 targetd, see the chart below.
Fig 1: BBDXY Index:
Source: MNI - Market News/Bloomberg
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FED: March Economic Projections: Higher Inflation, Weaker Growth, Same Rates
The MNI Markets Team’s expectations for the updated Economic Projections in the March SEP are below.
- The unemployment rate is likely to rise slightly for 2025 alongside a downgrade in GDP growth, while the 2025 core and headline PCE inflation projections are set to rise again. Changes to later years will likely be limited, however.
- More detail on the shift in Fed funds rate medians is in our meeting preview - we will add more color next week.
FED: Market Pricing Nearly 3 2025 Cuts As Conditions Tighten
Amid rising government policy uncertainty, sentiment among businesses and consumers has fallen sharply since the start of the year, while equities and the dollar have reversed their post-election rise. Overall, financial conditions have tightened, even if stress is not yet mounting, e.g. no major widening of credit spreads (the accompanying chart shows the Fed’s financial conditions impulse index but only through January).
- Combined with growth fears, this has affected expectations for the Fed’s rate path, with around 18bp more cuts expected in 2025 compared with what was seen after the January FOMC. 65bp of cuts are priced for the year as a whole. 2025 cut pricing reached 71bp before the February inflation data and 76bp before the February payrolls report.
- A rate cut is seen with near zero probability for March’s meeting, but the first full cut is just about priced for June, with a second nearly priced by September.
- Chair Powell has no reason to endorse or refute these expectations – he’s likely to be happy with a press conference that ends with little discernable change in pricing.
CANADA'S CARNEY ANNOUNCES ELIMINATION OF THE CONSUMER CARBON TAX
- CANADA'S CARNEY ANNOUNCES ELIMINATION OF THE CONSUMER CARBON TAX
