Equity turmoil is adding to the dollar’s strong momentum, which is also benefiting from hawkish Fedspeak. The ECB’s Lane tried to readjust communication on the hawkish side after Lagarde’s comments on Monday, but poor German PMIs aren’t helping the euro’s case. In Australia, hot core inflation points to a hawkish RBA, even if we don’t expect any more hikes.
USD: Hard to pick a top
The tech-led equity sell-off has started to significantly spill over into FX. Since the sentiment jitters originated in Asia and are centred on semiconductor stocks, the Aussie and Kiwi dollar have been hit hard, alongside SEK and NOK, which tend to underperform as liquidity dries up in risk-off conditions.
The canonical safe havens USD, JPY, CHF are doing well, but only one – the dollar – can also offer an attractive domestic story from a growth and carry perspective. Whether this is a moderate correction in a stellar year for AI stocks or the start of a more prolonged equity downturn, USD should outperform while risk aversion holds. In the latter scenario, however, a potential dovish repricing in the Fed curve – if met with actual easing – could leave the greenback much weaker in the medium term.
US and Europe’s equity futures are stabilising this morning, suggesting consolidation may be more likely than another major leg higher in the dollar. But for now, we remain very cautious about picking a top in this USD move. We still don’t think this is the start of a new bullish USD cycle, but near-term momentum remains bullish. Fespeak has also added support, with the generally neutral FOMC member Austan Goolsbee saying yesterday that inflation is too high and going the wrong way.
EUR: Eyeing 1.130
The equity sell-off primarily drove yesterday’s EUR/USD drop, but PMIs also did little to challenge the narrative of diverging US-EU growth. While US surveys got a small bump from the Middle East de-escalation, Germany’s service PMIs dropped from 48.1 to 46.8, dragging the composite further into contraction territory. That clouded an otherwise decent read for the eurozone, where the composite PMI at 49.5 is close to returning to expansion.
On the positive side for the euro, ECB Chief Economist Philip Lane sounded quite hawkish, warning that inflation is set to stay above 2% for some time. This looks like an attempt to push back against President Lagarde’s dovish messaging on Monday, with Lane perhaps better reflecting current Governing Council consensus. There’s a good chance we’ll hear more ECB members offering a more hawkish stance for that reason.
Still, the EUR:USD two-year swap rate differential is now at the widest since September. Back then, markets were maintaining a material risk premium on the dollar on the back of the long tail of Liberation Day and USD hedging flows. The spring energy crisis is making markets more prone to price that risk premium into the euro instead. Incidentally, Danish buy-side data show a material drop in February-April in USD hedging ratios, in line with the dollar reestablishing its full safe-haven appeal.
EUR/USD is at risk of testing 1.130 sooner than later, but we are already trading at almost 1% undervaluation relative to our short-term fair value estimate, and we remain generally optimistic on a recovery in the coming months as Fed hawkish bets may start to be gradually scaled back.
AUD: Hot core CPI to keep RBA communication hawkish
AUD/USD is taking a breather just above 0.690 this morning after plunging on the tech sell-off. AUD has the highest correlation in G10 with the Philadelphia Semiconductor index, meaning downside risks remain elevated in the near term if AI valuation concerns persist.
Domestically, the picture for AUD remains strong, but is hardly relevant for near-term moves, considering the challenging external environment. Overnight, Australian headline inflation unexpectedly slowed from 4.2% to 4.0%, but the trimmed mean (the main core measure) accelerated from 3.4% to 3.6%. This second measure is what matters the most for the Reserve Bank of Australia. While we don’t expect another hike from the bank, this print should encourage a still hawkish tone in upcoming communication.
We remain optimistic on an AUD/USD recovery well above 0.70 in the second half of the year on the back of strong AUD fundamentals and our dovish Fed call. But in the short term, downside risks persist. The pair is close to key supports at 0.690 and the 0.683 March low.
HUF: NBH becoming the most dovish player
The National Bank of Hungary cut rates yesterday by 25bp to 6.00% in line with expectations. The press conference brought a dovish outcome to the market, particularly due to the very low inflation forecast for this year and next (1.8% and 2.3%), heading well below our expectations and market consensus – making the NBH the most dovish forecaster on the market. Also, the commitment to two rate cuts during the summer and calling for a “mini rate cut cycle” may be a reason for the market to see this meeting as clearly dovish.
The press conference sent EUR/HUF above 356, but it eventually stabilised somewhere in the 355-356 range. These are levels where we would expect some resistance and attractiveness for new forint buyers. However, together with the NBH meeting, we also see a switch in global sentiment to be more risk-off with an equity sell-off and a stronger US dollar, which gives the forint additional risk of a sell-off in the near-term.
On the other hand, from a rates perspective, the market has basically priced in the rate cuts that the NBH mentioned yesterday. The front-end of the curve does have reasons to rally, and we see further steepening as we discussed in the NBH preview. Still, this should not be a game-changer for FX. In rates, the market is pushing the NBH rate terminal lower to the 4.50-4.75% range after the press conference, and we are likely to see a further rally in the coming days. This is still higher than we saw pricing in 2024 of around 4.25-4.50% under less favourable conditions for the central bank. Therefore, we believe the front-end has more room to go lower, and the bull-steepening of the curve will continue.
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