Weekend Update
The weekend brought little significant news, but the involvement of the Houthis in the conflict is raising alarms about global supply chains and the potential for increased military tensions. The U.S. dollar remains strong, while trading partners facing currency pressures are looking at various strategies to counteract this devaluation. Interestingly, the Indian rupee showed a slight increase today after local regulators set a $100 million limit on onshore positions for local banks. This follows reports that the Reserve Bank of India spent around $30 billion to support the rupee this month. Currency interventions are ongoing, and many are considering maintaining tight monetary policies.
What stood out overnight was the release of the Bank of Japan’s minutes from its March 18-19 policy meeting. The discussions included several references indicating that current monetary policies are “outdated” and significantly below neutral levels. There was also talk about the magnitude of potential interest rate increases. Could we see a 50 basis point hike? The first quarter Tankan survey set to be released on Wednesday might heighten expectations for a 25 basis point hike in April, though currently only about 70% of analysts have included that in their forecasts.
We’re also monitoring dollar cross-currency basis swaps for any indications that funding for the dollar may tighten. Short-term EUR/USD indicators are showing slight widening, and any significant shift in this could link dollar strength with a general strain on risk assets.
This week’s focus for U.S. data is largely on the labor market. Key reports will include JOLTS job data, ADP figures, and the March salary report. With the upcoming Non-Farm Payrolls release expected to show a consensus job gain of +60,000 and an unemployment rate of 4.4%, markets are pricing in potential Federal Reserve tightening later this year as a response to ongoing energy disruptions. An unexpected drop in these figures could negatively impact the dollar.
The DXY is trading above 100 again and is likely to test resistance levels around 100.25/50 this week. Without clear conciliatory signals from Iran, it seems unlikely that the dollar will recover its gains from earlier this month anytime soon. Additionally, watch for comments from Federal Reserve Chairman Jerome Powell, who will be participating in a moderated discussion at Harvard University today at 4:30 PM CET.
