Weekly Investment View: 3 Reasons to Stay Long USD

This Week

Bilal gives three reasons to stay long USD; Caroline analyses the South Africa election and its potential impact on ZAR; Henry maintains that the ECB and BoE will both cut in June, paying April-ECB dated ESTR and receiving 2Y GBP swaps versus paying 2Y EUR; Ben thinks there is a larger risk of an undershoot in Sweden’s February inflation data; Viresh sees further upside for oil amid supporting February seasonals; John previews Nvidia’s earnings report, with the market already pricing in a lot of good news.

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Bilal Hafeez – Global Macro

The strong US CPI release on 13 February put a short-term top on the dollar. However, we remain long vs GBP and EUR for three reasons.

1. Investors are sellers below 1.09. Real money and hedge funds have been sellers of EUR/USD around 1.08, preferring to buy at 1.09. Likewise, our momentum models tend to flip from ‘sell’ to ‘buy’ at 1.09, suggesting CTAs would follow. So flow signals still support a short EUR/USD position.
2. US growth beats RoW. Both the Atlanta and NY Fed nowcasts for Q1 growth are around 2.8%, while the euro area’s nowcast is a paltry 0.4%. Consensus forecasts for 2024 growth are consequently being revised up for the US and down for the euro area.
3. Fed should help USD. Real yield spreads currently correlate well with EUR/USD. We think real yields will rise as the Fed acknowledges higher inflation, boosting USD. Meanwhile, euro-area yields could fall if anemic growth forces the ECB to blink.

Caroline Grady – Emerging Markets

President Cyril Ramaphosa could announce the date for South Africa’s general election this week. The vote must happen by August (as the president must call the election within 90 days of the current parliamentary session ending). However, a sooner date of April or May could be set. A firm date will focus attention on the opinion polls where surveys still show the ruling ANC polling below 50%.

The latest Ipsos poll shows the ANC at 38.5%, the far-left EFF at 18.6% and the DA at 13.3%. The Multi-party Charter for South Africa – the DA-led opposition coalition intended to oust the ANC – is currently polling around 33%. Potential coalition options, and the market impact, will be an increasing driver for ZAR in the coming months.

Henry Occleston – Eurozone & UK Macro

The start of the week saw ECB negotiated wage growth for Q4 2023 come in at +4.5% in Q4 versus +4.7% in Q3 (Chart 2). This largely aligned with the market lean towards a drop in the YoY rate. The major reading will be the Q1 negotiated wage data (when the bulk of renegotiations are made). As such, it does little to change my expectation that the ECB can wait until June to cut. I still see value paying April-ECB dated ESTR.

Meanwhile, the BoE gave its testimony to the Treasury Select Committee on Tuesday. The tone of questions focused on misses in forecasts (Bernanke’s review of forecasting is due in Spring) and pressure on when the BoE will start cutting. Bailey’s remarks were taken dovishly, though he tried hard to say as little as possible on his position versus market pricing for cuts (he said it is not unreasonable for the market to be pricing cuts, but that is not saying much). We expect they can begin cutting in June and like receiving 2Y GBP swaps versus paying 2Y EUR.

Ben Ford – $-Bloc & Scandies

Sweden’s January core CPIF printed 0.1pp below the Riksbank forecast but, surprisingly, in line with consensus expectations. It is the first time consensus has correctly forecasted January core MoM and YoY outturns.

We saw risk of an upside surprise from stubborn clothing prices, a smaller reversal of December transport increases, ever-strong housing, and recently decreased January recreation discounts. Meanwhile, Matpriskollen – a company that tracks food prices in Sweden – registered the largest increase in food prices in January since March. That added to our case.

Our expectations played out in clothing and housing but not in transport and recreation. A double whammy of airport/package holidays saw normalisation in the January discount that sits in both subcategories of CPIF. Food prices also saw the smallest January increase since the inflationary cycle began.

The probability of an upside surprise in inflation is diminishing. Core inflation momentum has normalized, and seasonal risks have reverted to their pre-Covid trend. There is now risk of a larger inflation undershoot in February, due a day before the February unemployment data and less than two weeks before the March meeting (Chart 3).

Viresh Kanabar – Commodities

Brent is trading around $83/bbl with prompt spreads currently backwardated by $0.54.

The curve now fairly reflects the potential for a tighter market. We know February tends to be one of the best months for oil seasonally, so we watch for an overshoot on the upside.

Most interesting has been the recent divergence between the oil price (which has held up) and the gasoil cracks (which have retreated). We think the decline in the latter has been mostly driven by crowded gasoil longs, so there could be an opportunity to buy the dip should the decline persist.

Elsewhere, the IEA recently reported that observable stocks on land fell 60mn barrels in January. While usually very bullish, this data needs contextualising.

For one, part of this decline is related to delayed shipments due to tankers going around the Cape of Good Hope. Also, we know China has continued to draw down on its crude inventories ahead of Lunar New Year, despite Brent hovering below $80/bbl – this has removed demand from the market. Finally, disruptions in the US and Libya resulted in reduced oil production, which we know has now bounced back in February.

Therefore, we must wait for February data to understand market balance. At least in the US, the ‘big four’ stocks (crude, gasoline, distillates, and jet) have been steady since the start of the year – a time when we tend to see builds.

In terms of flows, oil ETFs are no longer leaking cash, after seeing around $150mn of net outflows over the last months. The most recent reading shows the largest oil ETFs saw a small net inflow of $20mn. A more convex curve has helped to make oil more attractive in the near term.

John Tierney – US Equities

We expect equities will settle into a trading range after last week’s hot CPI and PPI reports until investors develop new conviction about the timing of rate cuts. We caution that valuations have reached a point where there is some risk of a selloff on any bad news.

Both Adobe and Alphabet sold off last week on reports that OpenAI is now targeting Google Search and Adobe’s creative cloud. Clearly the potential for AI-driven disruption is all but boundless.

Whether those developments defuse some of the AI mania that has driven a few names higher may depend on Nvidia’s earnings report, due Wednesday after the close.

Another beat is likely – but a lot of good news is priced into the stock too.

Retailers Home Depot and Walmart report Tuesday; their outlooks will be key in shaping expectations about consumer spending in coming months.

(The commentary contained in the above article does not constitute an offer, a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)