FX Daily: Dollar Support Broadens

An encouraging, if slightly flattering, US JOLTS job openings figure gave the dollar broad support yesterday, and similar positive news could be incoming today. It looks like last year's dollar debasement trade is under some pressure, and that the dollar might have further room to rally. USD/CHF could be the focus here.

USD: De-basement trade under pressure

The dollar continues to edge higher as US data surprises on the upside, and the market considers a Fed hike this year. Yesterday's US April JOLTS data was the latest to surprise, with job openings rising to the highest levels since May 2024. The headline number seems flattered by the rise in professional and business services, but the data supports the narrative that the US economy could be re-accelerating despite stretched consumer finances.

There may be more positive US data today in the form of the monthly ADP employment figure – a healthy +120k advance is expected – and then the May ISM services figure. The latter provides insights into order books, employment and prices, all of which could support the view that the Fed might have to hike by the end of the year. This evening also sees the release of the Fed's Beige Book ahead of the 17 June FOMC meeting. Reports of steady labour markets and any signs of robust pricing power should send short-dated US rates and the dollar higher.

Looking at financial markets more broadly, we can see low volatility favouring carry trade strategies in the high-yielding energy-exporting currencies of Brazil and Nigeria. We can see South Asian currencies under heavy pressure – e.g. Indonesia – as trade surpluses are wiped out by the oil shock. And now in the G10 space, we can see the dollar winning a few friends on the view that the Fed may have to tighten after all. It also looks like there could be further unwinding of last year's popular dollar de-basement trade idea, where expectations of a compromised Fed had led to demand for gold, bitcoin and the Swiss franc. Gold and bitcoin certainly have not performed as well as expected through this year's inflation shock, and a more hawkish Fed over the coming months could well be played out via a higher USD/CHF.

We favour DXY to test the top of the short-term trading range at 99.50/55 – assuming ADP and ISM data perform.

EUR: Hawkish ECB to protect the euro's downside

The market now fully prices in a 25bp ECB rate hike on 11 June and another 25bp hike on 10 September. The ECB is probably happy with this pricing, which is keeping inflation expectations in check. Here, the five-year inflation swap five years forward is contained at 2.15% – not too far away from levels seen in February. This kind of ECB pricing can help insulate against incoming inflation data, with April PPI data today expected to surge to 5% YoY. Interestingly, we have been receiving anecdotal evidence that European corporates have been far quicker to pass on input price increases this year than they had in 2022.

EUR/USD came under pressure after the strong JOLTS figure yesterday. Another round of good US data could see it dip back to the recent low at 1.1575. The euro still faces some downside risks should oil prices break higher again. The Gulf crisis is far from resolved and every day the Strait of Hormuz remains shut brings us closer to the tipping point (some see that in September) where inventory drawdowns can no longer offset shut-in production. On that subject, consensus expects a 3.3m barrel decline in US oil inventories over the last week. Any bigger-than-expected drawdown could send oil prices higher and weigh on EUR/USD.

CHF: Coming under some pressure?

EUR/CHF has been drifting higher this week. That is probably a function of the global sell-off at the short end of the rates curve, where EUR/CHF is effectively driven by the ups and downs of short-dated EUR swap rates. The rationale here is that the Swiss National Bank will not be adjusting its zero interest rate policy anytime soon and thus short-dated swap differentials are only driven from the euro side.

On Monday, we also said that we felt any Fed-driven dollar strength would be best played out against the low-yielding yen and Swiss franc. Last year it looked like the Swiss franc had been the big beneficiary, along with gold and bitcoin, of the dollar debasement thesis. If, however, the market starts to have greater confidence that the Fed will hike after all, those debasement trades could be further unwound. Keep watch on gold and bitcoin. Any further losses there could see pressure build for USD/CHF to break through resistance at 0.7910/25 in a move to test 0.80.

CEE: Hawks and doves take turns

The National Bank of Poland left rates unchanged at 3.75% yesterday, as expected. Unsurprisingly, May inflation coming in lower than expected gives the central bank more room and allows it to wait for the new July forecast. The statement following the June MPC meeting is neutral and broadly similar in tone to that of May. The reference to an increase in employment in the economy in year-on-year terms as a whole (despite a decline in the enterprise sector) suggests that the MPC has fewer concerns about the state of the labour market.

We will learn more about how the MPC assesses the current economic situation during today's press conference by NBP Governor Adam Glapinski. We do not expect hawkish elements in the conference. The rate differential indicates EUR/PLN to be in the upper half of the usual range of 4.225-265. However, the NBP has not had much influence here in recent months and the zloty is still driven mainly by global sentiment, which suggests a rather muted reaction to today's press conference.

The Czech koruna strengthened by 0.3% yesterday, which is the third-biggest jump this year. Of course, in a CEE or EM context, it would seem that nothing is happening, but in the case of EUR/CZK it is an unusual move this year. Hawkish comments by the Czech National Bank are prompting markets to rethink the timing of rate hikes, with June now firmly in play – especially alongside the approaching ECB move. CZK has had low volatility for a long time and positioning is probably very light, so any significant action by CNB could now set FX in motion. The koruna may find an unexpected supporter in the central bank and EUR/CZK may test this year's lows below 24.200.