In quiet markets, focus in the G10 FX space has switched to New Zealand. The previously dovish RBNZ came very close to a rate hike last night, with a split 3-3 vote being decided in favour of a hold by the governor Anna Breman. In his RBNZ preview, Francesco Pesole had warned about the hawkish risks, including an upward revision to the forecast path for the policy rate. In the end, the upward revisions were even more aggressive than market pricing. Instead of gradually taking the policy rate to 3.00% by the end of 2028 as outlined in the February projections, the RBNZ now sees the policy rate at 3.00% in early 2027 and a terminal rate now at 3.25%. In response, the bond market bear-flattened and NZD/USD rose 0.7%.
We mention the RBNZ here because we have seen a previously dovish central bank, faced with an economy operating with a negative output gap, prepared to hike rates sooner and more aggressively than previously. True, the current 2.25% policy rate is seen as accommodative. But the fact that the RBNZ currently sees CPI heading back to 2% next summer (after spiking to 4.3% later this year) serves as a reminder that even the doves are taking no chances with this energy shock.
That brings us to the Fed. Barring a dramatic collapse in the AI build-out story, it looks as though we could be moving into a hawkish phase. Tomorrow will see the release of the April PCE price data, where inflation will be moving further away from the Fed’s 2.0% target. And the build-up to the June FOMC will see increasing focus on the need for the Fed to remove its implicit easing bias. At 10CET today we will hear from Dallas Fed President Lorie Logan, one of the three hawkish dissenters at the April FOMC meeting. We suspect this environment can keep the dollar supported into the June FOMC meeting – although the wild card will be what new Fed Chair Kevin Warsh makes of all of this. We doubt he can sound too dovish too early in his tenure for risk of destabilising the long end of the bond market.
The above also has implications for the yen. Until the Bank of Japan starts to sound hawkish and dangle the prospect of leaving its very negative real interest rate setting behind, the yen looks set to remain offered.
Beyond the Lorie Logan remarks this morning, the only other notable US input today is the weekly ADP jobs release. This moved to a new cycle high of +42k last week and another strong number again today will confirm that the Fed can be comfortable with its full employment mandate while focusing squarely on inflation risks.
Expect DXY to remain supported in a 99.00-99.50 range.
Chris Turner