FX Daily: Falling interbank rates should drag the dollar lower

Risk assets start the week on a slightly firmer footing as investors start to focus on how quickly lockdowns can be ended and to what degree economies can slowly start to recover. On that subject, this week will start to see the release of the Q120 GDP numbers. In the US, ING’s James Knightley sees Wednesday’s 1Q GDP number at -6% quarter-on-quarter annualised, versus -3.9% consensus. Wednesday will also see the FOMC meeting, where the focus may be on the Fed’s unlimited quantitative easing programme. Here, the pace of bond buying has slowed over recent weeks. However, the Fed must be pleased with its actions – especially in the money markets. Last week saw total commercial paper issuance up 20% on levels at the start of April and importantly 3m dollar Libor rates are falling fast – now just 0.88% versus the climb to 1.45% in late March. This reduces dollar hedging costs, which for eurozone and Japanese-based investors have dropped to 0.86% and 0.68% versus levels above 3% barely a year ago. The notion of US exceptionalism in terms of growth and rates can therefore no longer be levelled at the dollar and is one of the key reasons we look for EUR/USD and USD/JPY to end the year near 1.20 and 100, respectively. Please see our April edition of FX talking for all our latest FX views. For today, a quiet day for data could see DXY drift to 99.50.

The euro is enjoying a little reprieve from Eeurozone debt stress after S&P avoided downgrading the sovereign on Friday. In contrast to last week (where EUR stayed offered into the disappointing EU summit), the EUR could find gentle support ahead of Thursday’s ECB meeting where the ECB could potentially add fallen angels (high yield) to its bond buying programmes and perhaps expand the size of its PEPP scheme as well to head off concerns that PEPP would be exhausted by late summer. EUR/USD breaking above 1.0880/0900 would be encouraging.

The return of Prime Minister Boris Johnson to cabinet and soft dollar could see cable to 1.2520 today.

The political crisis in Brazil took us, and most investors, by surprise and it is still too soon to gauge its implications. Investors are naturally likely to worry about risks to the economic agenda, especially the near-term outlook for fiscal accounts following the fiscal relief packages approved by Congress. The risk is that Congress, or President Jair Bolsonaro, decide to abandon the fiscally-conservative tenets advocated by Economy Minister Paulo Guedes, resulting in his departure from the administration. Such an event would be especially negative for local assets and could ultimately threaten the sustainability of Bolsonaro’s own administration. We see USD/BRL trading to 5.80 in one month.