FX Weekly Strategy: Asia, March 30th-April 3rd

We expect March’s non-farm payroll to rise by a marginal 20k overall and by 30k in the private sector, returning to a subdued trend after a strong January increase was mostly reversed in February. A rise in unemployment to 4.5% from 4.4% and a slower 0.3% increase in average hourly earnings would further suggest  a subdued labor market picture. The average of January’s 126k increase and February’s 92k decline is 17k, while for the private sector a 146k January increase and a fall of 86k in February leaves an average of 30k. In December the three month private sector average was 32k and that for overall payrolls negative at -7k, depressed by particularly heavy public sector layoffs in October, as DOGE layoffs came through.

30k appears to be where the private sector trend is and government is likely to remain slightly negative even if the DOGE layoffs are now history. 30k may even overstate trend and risk for revisions is negative, though this month they are likely to be modest, insufficient to turn the private sector trend negative.

We expect a 40k increase in March’s ADP estimate for private sector employment, which would be consistent with a 4-week average of 10k in the weekly ADP employment report for the weeks to March 7. That was the week before the monthly data was surveyed. There may be some upside risk in the survey week given milder than usual weather and a fall in initial claims in that week. We expect the ADP data to marginally outperform a 30k increase in private sector non-farm payrolls, while we expect overall payrolls excluding government to increase by 20k.

There may be some upside risk in the survey week given milder than usual weather and a fall in initial claims in that week. We expect the ADP data to marginally outperform a 30k increase in private sector non-farm payrolls, while we expect overall payrolls excluding government to increase by 20k.

We expect the US trade balance to continue to show volatility in February, with a deficit of $68.0bn, up from $54.5bn in January but below December’s $72.9bn. The deficit would remain slightly below where trend was running in 2024, around $75.0bn per month, before a pre-tariff surge and a post-tariff plunge. The volatility in recent trade data has been most pronounced in a small number of components. Exports bounced sharply in January led by precious metals and non-monetary gold, both of which look unsustainably high though an immediate return to trend is far from assured. Also strong in January were exports of aircraft, which Boeing data suggests will be less so in February, and computers, where trend is strong but January strength will be difficult to sustain. Pharmaceutical preparations may however pick up from January weakness. Overall we expect goods export volumes to fall by 4.0% after a 7.4% January increase but price gains will restrict the nominal decline in goods exports to 2.5%.

We expect March’s ISM services index to slip to 55.0 from February’s 56.1, which in being the highest reading since July 2002 looked unsustainably high, even ahead of the Middle East conflict. The Middle East conflict presents downside risk to consumers due to higher energy prices. The strength of recent ISM services data has not been matched by the S and P services index, which is trending in the opposite direction. Regional service sector surveys show continued weakness from the Empire State and Philly Fed in March, though the Richmond Fed’s did see a bounce from a weak February.

We expect February retail sales to see a modest bounce of 0.4% after a 0.2% decline in January, with sales ex auto increasing by 0.3% after two straight unchanged months. Ex autos and gasoline however we expect a rise of only 0.2%, down from 0.3% in January, keeping trend subdued. Data from the auto industry shows sales reversing most of a January dip while gasoline prices saw a partial correction of a dip seen in January. Gasoline prices look sure to surge in March.

Figure: Headline Sharply Higher, Core to Fall?

The first of the Iran War induced rise in prices arrive in the coming week with flash March HICP data.  We see the headline rate spiking higher to 2.6%-2.7 from February’s 1.9%, the former largely chiming with that implied ECB thinking from the latter’s recent updated projections.  But both it and ourselves see the core rate falling back in March regardless as this March surge will be purely energy-led.  But with us seeing more real economy damage which together with tight(er) financial conditions we do not see the HICP rising as much as the ECB envisages beyond this quarter, albeit we do concur that the headline may be back below target by mid-2027.  Thus we see the peak in HICP inflation just under 3% around mid-year.  We accept risks – but on both sides but with those on the upside for inflation being possible price gouging (ie over-charging) given the manner in which the likes of heating oil prices have soared!

For the week ahead

UK

Coming before final manufacturing PMI data (Wed), Monday sees money and credit data from the BoE. The following data sees revised Q4 GDP data where we no material change this arriving with Q4 current account numbers where the overall deficit, including trade in precious metals, narrowed by £ 9.1 billion to £ 12.1 billion, or 1.6% of GDP, in Q3 but may deteriorate afresh by about £ 10 billion. Thursday sees the BoE also releasing its Decision Makers’ Panel survey.  Also from the BoE, Wednesday sees Financial Policy Committee Record.

Eurozone

Data wise sees March HICP (Tue), the first piece of hard data since the Iran War started.  On the back of the surge in energy costs, we see the headline rate spiking higher to 2.6%-2.7 from February’s 1.9%, the former largely chiming with that implied ECB thinking from the latter’s recent updated projections, but both it and ourselves see the core rate falling back in March regardless.  NB; EZ HICP data are preceded by German consumer price data on Mar 30, but which may rise even more due to both a lack of service price correction back and a relatively more sizeable adverse energy base effect.

But another key release of the week being the labor market report (Wed) which has been volatile of late but providing a misleading picture of the labor market.  In regard to the latter final manufacturing PMI data (Wed) may offer little new but there will be important messages in the European Commission survey data (Mon), this largely covering data up to and including this month.  Otherwise there are four ECB Council speakers all appearing on Tuesday.

Rest of Western Europe

Sweden sees retail sales numbers (Mon).  Switzerland sees CPI data with headline likely to stay around 0.1% y/y. On Tuesday, Riksbank Deputy Governor Jansson speaks about the latest interest rate decision and the economic situation. Switzerland (Thu) sees CPI data with the headline likely to rise from 0.1% y/y to at least 0.3%.

USA

It is a busy week for US data, most significantly the March non-farm payroll on Friday, though markets on that day will be will be closed for Good Friday. We expect a marginal 20k increase, returning to trend after a strong January and a corrective decline in February, with private payrolls up by 30k, average hourly earnings up by 0.3% and unemployment rising to 4.5% from 4.4%. On Wednesday we expect March’s ADP employment report to show a 40k increase in the private sector. Other labor market indicators are February’s JOLTS report on job openings on Tuesday and weekly initial claims on Thursday.

Tuesday sees March data on consumer confidence which is likely to take a hit on higher gasoline prices. We expect February retail sales on Wednesday to increase by 0.4%, 0.3% ex auto and 0.2% ex auto and gasoline. We expect Wednesday’s ISM manufacturing index to remain firm at 52.5 from 52.4. The ISM services index has been delayed to Monday April 6 from Friday. On Thursday we expect a rise in February’s trade deficit to $68.0bn from a narrower $54.5bn in January. Minor releases due are January house price indices from S and P Case-Shiller and FHFA on Tuesday, and January business inventories on Wednesday. Fed speakers will include Williams on Monday, Goolsbee on Tuesday and Musalem on Wednesday.

CANADA

We expect an unchanged outcome from January Canadian GDP on Tuesday, in line with a preliminary estimate made with December’s data. Tuesday sees March’s S and P manufacturing PMI, as well as Bank of Canada minutes from March 18. February’s trade balance is due on Thursday.

JP

Tokyo CPI on Tuesday will be the key release for Japan next week. The headline CPI has fallen below 2%, so as core-core for Tokyo but not National. If we continue to see core-core CPI below 2%, it may trigger concern from the BoJ. Though we believe it was mostly base effect as wage growth remain supportive. We also have labor data nad retail trade on the same day. Yet, those will not be as important as BoJ summary of opinion released on Monday.

AU

Only trade balance the likely market moving data point for Australia. Ele, there are PMIs on Wednesday.

Recap of the week

Figure: Iran War Scenarios and Oil Prices        

Source: Continuum Economics.  Other scenarios are less than 5% e.g.  Collapse of regime/Civil War and move towards free election or IRGC overthrowing clergy.

Our central scenario remains a 4-8 week war in Iran. Trump’s loathing of long wars and high gasoline prices will likely prompts the U.S. to declare victory.  A formal ceasefire is unlikely, but the end of hostilities could see an informal understanding of the Straits of Hormuz for most shipping, though conditions will remain fragile. Shipping could recover and energy flows help to reduce the oil risk premium by mid-year.  We would see WTI at USD75-80 by end June and USD65-70 by end December. The main alternative scenario is a 2-6 month war, which could squeeze WTI oil prices up to USD120-180. 

We are fine tuning our Iran war scenarios (Figure 1).  The U.S. on balance is heavily biased towards a 4-8 week war, both as high gasoline/diesel prices risk the GOP losing the Senate as well as the House in November mid-term elections and as Trump strong bias is against long wars. Trump threat March 21 to bomb Iran’s power plants and then subsequent decision to postpone for at least 5 days is consistent with this 4-8 week war view.  The one issue is that Trump does not like the image of him losing and so any end to fighting will be declared a victory for PR spin.  Israel would likely stop attacks on Iran with the U.S. end of military strikes.  Israel could have an election as early as May and Netanyahu claims Iran nuclear capabilities is crippled.  However, Israel has signalled it would likely continue the war with Hezbollah.  Iran is the key swing factor between a 4-8 week war and 2-6 month war.  Iran is asking for U.S. and Israel commitment against future attacks or they will continue the asymmetric war against energy and effective closure of the Straits of Hormuz.  However, Iran has suffered severe damage to conventional military offense and defence and is vulnerable to its shipping/exports being stopped e.g. Blockade or invasion of Kharg island.  On balance, Iran will likely accept an end to hostilities rather than fighting on.  We thus feel that a 4-8 week war is the highest probability, but this is unlikely to see a formal ceasefire with concessions (see below). The scale of energy infrastructure damage is also a further consideration for future energy prices and economic effects.  We highlight below the two main scenarios that could occur, with some broad estimate of probability – with the understanding that these will likely change based on decisions in Iran/U.S. and Israel.     

Figure: Revised Norges Bank Policy Outlook

While no change in policy was expected from the Norges Bank’s verdict this month, the clear shift in rhetoric was almost inevitable.  It dropped its recently repeated assertion that ‘the policy rate will be reduced further in the course of the coming year’ and instead suggested that ‘the policy rate will likely be raised at one of the forthcoming meetings’.  Its forecast implied that this would entail one or two 25 bp hikes but that these will be short-lived with the policy rate coming down afresh from early next year.  Amid suggestion that a hike was considered at this juncture, we would not exclude the Norges Bank from exercising this bias even amid what it terms the uncertainty surrounding oil and gas prices is unusually elevated.  But we feel the Board is being excessively hawkish and not just on account of the stronger currency seen of late.

Indeed, this clear warning of hiking is premature to say the least – NB the softening in house prices now emerging is very probably a reaction by households to the reining in of rate cut expectations in recent months, ie prior to the outbreak of the war in Iran, let alone this hiking warning.  Moreover, the updated forecasts show an even greater output gap emerging and surely this will have more impact in reining in any inflation surge than one or even two 25 bp hikes.  Moreover, we question the extent to which the inflation upgrades are realistic with CPI-ATE now seen averaging 3.3% this year and 2.8% next, some 0.6 ppt and 0.4 ppt higher than envisaged three months ago.  Some of the upgrade to this year is due to the apparent fact that CPI data have been higher than expected, but is this an indictment of the Board’s forecasting as despite its assertions to the contrary underlying inflation has been reasonably well behaved.

Figure: Headline Stable But Core Higher

After January’s clear fall, even in the core rate, where the headline CPI rate fell from December’s 3.4% to 3.0% (a 10-mth low) it stayed there in February’s numbers – matching both consensus and BoE projections.  Services fell 0.1 ppt to 4.3% which was a four-year low (Figure) but the core edged back up a notch due to higher non-energy good inflation.  They were offset by slightly lower fuel prices, hardly a foretaste of what is to come in coming months as the Middle East conflict spills over with petrol prices as they were by mid-March likely to add 0.3 ppt the headline rate.   On the basis of our baseline 4-8 week war thinking, we see the headline CPI up to 3.5% in March but then falling back for a while before moving back to 3% in Q4 but then dropping back through 2027 to average 2.1%.

Admittedly, not all aspects of the CPI data were reassuring, albeit with a fresh fall in catering services inflation, often seen as an indicator of price persistence given that the sector’s cost base is very much wage related.  Even so, the evidence on this is mixed with HMRC pay data very clearly showing a slowing in wage inflation for accommodation and food services.  Regardless there are very clearly reassuring aspects most notable in still low lower rental inflation which at just over 3% has more than halved in the last year, surely an added sign that the housing market is in the doldrums.  But there was also a fresh rise in non-energy goods inflation which came in spite of both weak global demand and dumping of goods by China once destined for the U.S.

The DXY remains in the spotlight being the risk barometer. Market participants are buy/selling the greenback whenever the sentiment change and we expect such to continue until there is contagion from Iran strikes.

On the chart, consolidation above congestion support at 99.00 has given way to a push higher, with prices currently balanced around 99.65. Intraday studies are mixed/positive and oversold daily stochastics are ticking higher, highlighting room for continuation towards congestion resistance at 100.00. But the negative daily Tension Indicator is expected to limit any immediate tests beyond here in consolidation beneath critical resistance at 100.40/54. Meanwhile, support is raised to congestion around 99.50. A close back beneath here would help to stabilise price action and prompt consolidation above congestion around 99.00.

Fast approaching the 160 psychological zone, the traction in USD/JPY is stalled but not derailed. It looks likely we will not be seeing an actual intervention from the BoJ at the figure but if the rally persist for another figure or two within the week, the hand maybe forced. 

On the chart, the pair extending gains from the 157.50 low of last week and regain the 159.00 level has seen gains to retest the 159.75/90, 13/18 January highs. Daily studies have turned positive and suggest scope for break here to extend the bullish gains from April 2025 year low. Clearance will turn focus to the 161.00 level but potential will be for extension to retest 161.95, July 2024 multi-year high. Meanwhile, support is raised to the 159.00 congestion which should now underpin and sustain bounce from the 157.50 low of last week.