Short USD

USD continues to trade close to YTD lows ahead of US CPI report

USD: NFP report and Loan Officer survey fail to provide fresh trigger for sell-off

Fig 1 NFP last Friday 05/05/2023

 Source: https://www.finlogix.com/calendar

The US dollar has continued to consolidate at weaker levels at the start of this week with the dollar index trading just above the year to date low of 100.79 from 14th April. The US dollar has failed to derive much support from the pick-up in US yields since late last week. The 2-year US Treasury yield has climbed back up to 4.00% after hitting an intra-day low last week at 3.65%. The US rate market remains reluctant though to price in further rate hikes from the Fed and is currently discounting only around 2bps of additional hikes by the June FOMC meeting. In contrast, the US rate market remains much more confident that the Fed will have to reverse course and deliver rate cuts by the end of this year. There are currently around -68bps of cuts priced in by the end of this year. The dovish outlook for Fed policy has not been altered significantly by the release of the stronger non-farm payrolls report on Friday and the latest Fed Senior Loan Officer survey. The non-farm payrolls report provided further evidence that employment growth is slowing but not as fast as had been feared. Over the last three months, employment growth has slowed to an average of 222k per month compared to 524k per month a year ago. However, it remains sufficiently strong enough to ease fears that an even sharper slowdown/recession is already underway in the US. At the same time, the non-farm payrolls report revealed more robust average hourly earnings growth that increased by 0.5% in April. At the current juncture, I would view the stronger print as more of a one off with underlying trend growth running at around 0.3%/M on average over the last 3-6 months. Overall, the data highlights that it is not yet a done deal that the Fed will not raise rates further although I e agree with market pricing that there is a higher hurdle now especially with the upcoming US debt ceiling stand-off posing a risk to financial stability ahead of the next FOMC meeting on 14th June.

The Fed released their latest Senior Loan Officer Opinion Survey on Bank Lending Practices overnight. The survey has understandably attracted more attention than normal in light of the recent loss of confidence in US regional banks and fears amongst market participants that it will result in a significant tightening in credit conditions going forward that weighs more heavily on growth. The survey addressed changes in standards and terms on, and demand for, bank loans to businesses and households over the past three months, which generally correspond to the Q1. The respondent banks received the survey on 27th March and responses were due by 7th April. It covers the period just after the collapse on Silicon Valley Bank on 10th March. It revealed that the proportion of US banks tightening terms on loans for medium and large businesses rose to 46% in Q1 up from 44.8% in Q4 2022, and modestly higher at around 48% for small firms. The report also showed much weaker demand for credit. The proportion of banks reporting stronger demand for commercial and industrial loans dropped by 55.6% in Q1 which was the sharpest decline since 2009 during the Global Financial Crisis. There has been some initial relief though that the survey results could have been even worse. The next important US data release in the week ahead will be the latest US CPI report for April that is released today night, you can follow the headlines here: https://www.finlogix.com/calendar

In these circumstances, I remain comfortable to maintain short US dollar positioning even though the NFP report and Loan Officer survey failed to trigger a further sell-off.

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