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Weekly market update 15th April – Dollar extended its rally, fueled by prospects of higher interest rates by the Fed to rein in inflation

Weekly market update 15th April – Dollar extended its rally, fueled by prospects of higher interest rates by the Fed to rein in inflation

1. Dollar extended its rally reaching 100.76, a high not seen in nearly 2 years, as prospects of higher interest rates from the Fed to rein in rising inflation continue to support its climb. This came following the CPI data which showed that annual inflation hit 8.5% in March to reach a new 40-year high. However, the smaller-than-expected increase in US core CPI data, which stood at 0.3%, shy of market estimates of 0.5% suggested that inflation could be peaking. Despite welcoming signs of cooling inflation in the US, Fed Governor Brainard signalled expectations for a more rapid pace of policy tightening ahead. With the central bank still determined to deliver its hawkish stance with interest rates hikes and substantial shrinking of its asset sheet ahead, we could see the Dollar maintain its strength moving forward.

2. Euro tumbled to a two-year low against the greenback on the back of a stronger Dollar. In its April meeting, ECB policymakers indicated that asset purchases will likely end in Q3 while gradual adjustments in interest rates will take place some time after the end of the asset purchase programme. Meanwhile, rising inflationary pressures showed no signs of peaking as the crisis in Ukraine continues to mount. The initial steps taken by the European Union to ban Russian coal imports would also exacerbate the soaring inflation. Meanwhile, investors continue to keep their eyes peeled on the French presidential election, as incumbent Emmanuel Macron garnered 27.41% and his far-right challenger Marine Le Pen was next with 24.03% in the first round; a Le Pen victory could send shockwaves through France and Europe in ways similar to Britain’s vote in 2016 to leave the European Union. Pound held its gains against the greenback last week while yields on Britain’s 10-year Gilt rose to 1.81%, the highest since January 2016. This came following the latest CPI data which surpassed market estimates and boosted expectations for further rate hikes by the Bank of England. The CPI report showed the annual inflation rate accelerated to 7% in March, the highest since 1992 and above forecasts of 6.7% intensifying a cost-of-living squeeze faced by households. Markets expect the Bank of England to raise rates to 1% during the meeting on May 5th and see 140 basis points of hikes by year-end.

3. Commodity currencies retreated from their recent highs as the war in Ukraine intensifies. In Australia, higher unemployment levels could signal stagnant labour market conditions and relieve the central bank from the pressure to follow in the Fed’s footsteps in raising interest rates. Australia’s unemployment rate stood at 4%, slightly higher than market consensus of 3.9%. Meanwhile, the Employment Change stood at 17.9k, significantly lower than the estimates and the previous figure of 40k and 77.4k respectively. In its latest monetary policy meeting, the Reserve Bank of Australia kept interest rates unchanged at a record low of 0.1%, as widely expected, but opened the door to a rate hike, depending on future inflation and labor cost data. The Loonie hovered around 1.26 per USD as Canadian policy makers said the central bank will stop reinvesting maturing assets later this month and raised interest rates by 50 basis points to 1%, the most in two decades. With Canada being one of the world’s largest exporters of oil, the currency is also benefiting from higher oil prices as Western countries ramp up their sanctions against Russia. The International Energy Agency had warned that roughly 3 million barrels per day (bpd) of Russian oil could be shut in from May onwards due to sanctions, or buyers voluntarily shunning Russian cargoes.

4. Elsewhere, the New Zealand dollar extended its decline for three consecutive weeks to reach 0.68, as investors digested the latest Reserve Bank of New Zealand monetary policy statements. The central bank raised its benchmark interest rate by 50 basis points to 1.5% and accelerated its withdrawal of pandemic-era monetary stimulus to curb rising inflation. Moving forward, the central bank intends to take the cash rate to a more neutral stance and reduce the risk of rising inflation expectations. With the Fed ready to take on more aggressive actions and RBNZ’s shift towards a more neutral stance, we could see Kiwi weaken further against the greenback as their monetary policy diverge. The Ukraine crisis could also continue to dampen the appeal of the risk-sensitive currency.

Salzworth Asset Management