Goldman with the note.
USD: Not so fast.
We wrote last week that US policy-led repricing tends to lead to the most disruptive type of broad Dollar strength.
But the message from policymakers—and data—this week delivered the opposite.
The policy pushback of course came from both sides, with Japan’s apparent intervention setting the tone for other currencies in the region, particularly CNY.
Meanwhile, Chair Powell made it clear that while there may still be a high bar to cut, the bar is much higher to hike rates further. With the right tail of the distribution crimped again, it reduces the pressure on the cyclical, rates-sensitive currencies that would be under the most pressure from a policy-led tightening.
In our view, this week’s developments confirm that divergence, and the scope for bigger FX trends, is still limited.
At the same time, they do not alter our view that the Dollar is likely to stay “stronger for longer.”
The Fed’s outlook is still in flux, and the balance of data do not obviously signal a weaker economy (for example, our economists still estimate the underlying pace of job growth around 200k) or demonstrate a stronger case for faster rate cuts.
Against that backdrop, we think the Dollar will still be a hard bar to beat beyond the tactical horizon.
Nonfarm payrolls rose 175k in April, 65k below consensus and a 6-month low.
Job growth remained rapid in the healthcare industry but slowed sharply across leisure and government, raising the possibility that rehiring in those two sectors has mostly run its course.
The household survey was soft, with the unemployment rate increasing 0.1pp to 3.9%, driven by a 25k increase in household employment.
The underemployment rate also increased. Average hourly earnings rose 0.20% month-over-month, below expectations.
Our estimate of the underlying pace of job growth based on the payroll and household surveys now stands at 189k,though we estimate that counting immigration fully would boost this by 20k, and our estimate of the underlying pace of average hourly earnings growth stands at +3.5%.
Our Q1 wage tracker stands at +4.5% on a quarterly annualized basis and +4.3% on a year-over-year basis.
We continue to expect two rate cuts this year, in July and November.
After last week’s data in both countries, I believe the AUD is better placed for a run towards 70 cents to squeeze out some shorts
