Weekly market update 1 April – Dollar rebounded after release of disappointing labour market data, release of U.S. oil reserves drove down oil prices

Weekly market update 1st April – Dollar rebounded after release of disappointing labour market data, release of U.S. oil reserves drove down oil prices

1. The U.S. Dollar Index rebounded to above the 98.5 level at the start of April, as disappointing nonfarm payrolls data reinforced the general view that the Federal Reserve would need to tighten monetary policy more aggressively in the upcoming MPC meeting in May. The U.S. economy added 431,000 jobs in the month of March 2022, which was below market expectations of 490,000. However, the U.S. unemployment rate declined to 3.6% in March, down from 3.8%, which is a new market low since February 2020. Average hourly earnings grew at a stronger pace than in February. Nevertheless, the core PCE prices rose at the fastest pace in nearly four decades in February. The dollar also benefited from safe-haven flows as peace talks between Russia and Ukraine seem to have stalled. Going forward, the dollar is expected to maintain its strength in such uncertain times with strong inflationary pressures. In the coming week, investors will be watching out for FOMC meeting minutes that will be released mid-week for any indications of a shift in tone on its monetary policy.

2. The Euro and Pound both suffered against the stronger Dollar over the week. The Euro depreciated to $1.10, as optimism over the crisis in Ukraine and soaring inflation threatens the outlook of the economy. Inflationary pressures continue to drive market expectations that the ECB will end its era of negative rates sooner than previously anticipated. ECB President Lagarde has also remarked that the central bank could end its bond-buying programme in 3Q 2022 as headwinds from the war in Ukraine worsens inflation. The Pound also changed hands at $1.31, which is the lowest level since November 2020. The BOE delivered its third consecutive rate hike in March, bringing borrowing costs to pre-pandemic levels. Policymakers are warning that inflation, which is currently at 30-year highs, could further worsen during the year. Going forward, the two traditionally risk-on currencies could potentially face further pressures as the crisis in Ukraine has yet to ease, and inflationary pressures continue to affect economies worldwide. In the coming week, investors are looking out for BOE Governor Bailey’s speech early on in the week, which could potentially provide a clearer view of monetary policy in the U.K.

3. Commodity currencies generally suffered against the U.S. Dollar over the week. The Kiwi dropped to $0.69 which marked a 0.7% loss, while the Canadian dollar weakened towards $1.25 to record a 0.3% loss over the week. However, the Aussie managed to hold around the $0.75 level on Friday, as traders continued to brace for the RBA meeting next week. Investors continue to expect that the RBA will remain patient on policy. At the same time, the Aussie also benefited recently from stronger commodity prices over the past months, given the country’s status as a net energy exporter and a major producer of other basic materials. Going forward, the outlook of commodity currencies is mixed, as strength of commodity prices and the strength of the U.S. dollar continue to influence the relative strengths of each currency.

4. Oil prices saw some minor downside in the short term, with Brent crude closing 0.3% lower at $104 while WTI crude settled lower by 1% at $99 per barrel. Prices were driven down after U.S. President Biden announced a release of 1 million barrels per day for six months starting in May, which is the largest release ever by the U.S. Strategic Petroleum Reserve. Additionally, demand for oil was concerning as top consumer China reintroduced lockdown measures to curb a resurgence of COVID-19 cases. Similarly, gold prices also suffered, declining for about 1% to $1,930 per ounce, after the release of disappointing U.S. nonfarm payrolls. With expectations of a 50bps increase in the Fed funds rate in May to tame inflation, it could dent the appeal of non-yielding assets like gold. However, gold prices could still see some upside with investors looking to hedge against inflationary and geopolitical risks.