It has been another quiet week in FX markets, where the dollar has largely held onto gains made after Friday’s strong jobs report. These low volatility periods encourage more interest in carry trade strategies – which effectively see investors positioning in high-yield currencies to outperform their forward curves. For example, if you don’t think USD/JPY will sink to its outright forward rate of 145.95 in three months, one might want to hold dollars. Similar strategies are being employed in the emerging market space, where investors are holding long MXN/JPY positions (spot now 8.69) on the assumption that it does not drop to its three-month outright level of 8.44. That is a 3% gain if spot goes nowhere. It also seems that investors are attracted to similar strategies in the Turkish lira. On the subject of yen-funded carry, the Bank of Japan policy meeting on 26 April is probably the biggest threat to that trade.
What could rock these quiet conditions? Tonight sees a $42bn 10-year US Treasury auction – we’ll see how well that goes. Investors will also today be watching for any potential fallout on the US regional banking sector after Moody’s cut New York Community Bancorp’s (NYBC) rating to junk last night. So far the market is less concerned over systemic risk and seems happy to accept that pressure on NYBC has come more from the regulatory side after the bank’s assets exceeded $100bn. Probably the biggest event risk on our radar this week is Friday’s release of the annual US CPI revisions. Do the strong disinflation trends of late 2023 get revised away and leave the Fed in a slightly less comfortable position (a dollar-positive event risk)? We’ll discuss this topic in a little more detail later this week.
Perhaps the only slightly dollar negative scenario we see this week is one led by a risk-on environment should a Qatari-brokered Israeli-Hamas ceasefire make any progress.
Paying 5.3% on overnight deposits, the dollar therefore remains an attractive place to park money until some clearer trends develop. 104.00-104.75 looks to be the DXY range near term.
Chris Turner
