FX Daily Strategy: Asia, May 15th
US CPI the focus, soft USD tone may persist on neutral data
JPY weakness likely now close to limits
SEK focus on Swedish CPI, still upside scope for NOK/SEK
US CPI the focus, soft USD tone may persist on neutral data
JPY weakness likely now close to limits
SEK focus on Swedish CPI, still upside scope for NOK/SEK
Wednesday has the main data of the week in the form of US CPI and retail sales. We expect April CPI to rise by 0.4% overall for a third straight month but see the ex food and energy pace slowing to 0.3% after three straight months at 0.4%. We expect the strong start to the year to fade as the year progresses, though April PPI strength was disappointing and inflationary pressures will still look quite significant in April. Our forecasts are in line with the market consensus, so impact should be modest. With the market not fully pricing a Fed cut until the November meeting, there may be more downside than upside risk for the USD, especially after Powell’s comments yesterday. Although Powell acknowledged the lack of progress on inflation in Q1, he isn’t talking about a reacceleration, and at this stage a weak CPI number may be enough to bring the market back to fully pricing a September cut.
CPI should dominate, but there will also be some interest in the retail sales data, particularly given a run of softer US real sector data in the last couple of weeks. After a 0.7% increase in March, we expect April retail sales to rise by only 0.3%. Ex autos we expect a 0.2% increase to follow a 1.1% rise in March, while ex autos and gasoline we expect sales to be unchanged after a 1.0% increase in March which was the strongest since October 2022. Our forecasts are marginally below market consensus, and may support the perception of somewhat softer US data, but are still not materially weak.
For the USD, there has been some softness against the riskier currencies in the last week or so, in part due to some softer US data, in part due to some slightly stronger data out of Europe. Our feel is that the USD can weaken some more on neutral numbers, with the riskier currencies still benefiting from resilient equities. The underperformer in the last week has been the JPY, with EUR/JPY now up 7 days in a row by more than 5 figures. USD/JPY, which was moving with yield spreads for the last few years has risen well beyond the levels suggested by these spreads, and in the last few days has continued to rise despite spreads moving in the JPY’s favour. It’s hard to see this continuing without some opposition from the Japanese authorities, and if USD/JPY fails to come down organically after the US data, the BoJ may give it some help.
Before the US data we have CPI data from Sweden which may be less of a focus given that the Riksbank have already cut rates. But we still see some downside risks for EUR/SEK in the event of strong data, but more clearly upside risks for NOK/SEK in the event of weaker than expected numbers. Yield spreads still suggests substantial potential for NOK gains against both the EUR and SEK given the relative hawkishness of Norges Bank.