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Weekly market update 20th May – Dollar’s rally took a breather as recession fears rattled investors

Weekly market update 20th May – Dollar’s rally took a breather as recession fears rattled investors

1. Dollar pared recent gains to hover around 103 on Friday, following the drop in US treasury yields as ongoing weakness in US economic data stoked recession fears amid the Federal Reserve’s rapid monetary tightening. The Federal Reserve has raised its benchmark policy rate by 75 basis points so far this year and Fed Chair Jerome Powell emphasised that the central bank was committed to utilising its tools to rein in inflation, even if it meant going beyond widely accepted neutral levels. Meanwhile, demand for treasury bonds soared as investors flocked to safe-haven assets amid the uncertain global outlook. On the data front, Flash S&P Global PMIs, personal income and expenditure could reflect a weaker growth. Investors will also be awaiting the FOMC minutes on Wednesday for further clues of a 50 basis points rate hike in July.

2. Euro halted its decline against the greenback this week to trade at around $1.05, shy of hitting the dollar parity for the first time in twenty years as hawkish comments from ECB policymakers provided some boost to the currency. Minutes from the April ECB meeting pointed to a July rate hike as the central bank seeks to balance soaring inflation and slower growth, exacerbated by the ongoing crisis in Ukraine and the lockdown in China. Traders ramped up their expectations for higher interest rates after ECB policymaker Knot indicated that the central bank should not rule out a 50 basis point rate hike in July while ECB Villeroy de Galhau warned that a weaker euro could jeopardise the ECB’s efforts to keep inflation on track. Money markets are pricing in 105 basis points of ECB rate hikes by the end of the year, up from roughly 95 basis points earlier in the week.

3. Sterling hovered near its two-year lows at $1.25 following mounting fears of recession and stagflation. Rising prices for electricity, gas, and other fuels pushed annual inflation in the UK to 9% in April, the highest level since 1982. BoE has already hiked borrowing prices four times, but the chances of another hike are dwindling due to growth uncertainties. In the coming week, investors will be keeping a close watch on flash S&P Global PMI surveys for the Eurozone, the United Kingdom, Germany, and France in Europe, which could reflect a slowdown in manufacturing and services sectors amid the war in Ukraine.

4. The Aussie surged beyond $0.70 as statistics showed the country’s unemployment rate stayed at a historic low of 3.9% in April, bolstering hopes that the central bank would raise interest rates more aggressively. The Reserve Bank of Australia’s May meeting minutes revealed that the board is willing to hike the cash rate in bigger increments at future meetings if necessary to keep inflation under control. Reports that Shanghai will allow more firms in zero-Covid regions to resume normal operations from the beginning of June also buoyed demand for the risk-sensitive currency, as the country is poised to benefit from a resurgence in consumer demand, especially with China being one of Australia’s largest trading partners.

5. The New Zealand dollar rose above $0.635 as rising producer prices boosted expectations of another 50 basis point rate hike at the policy meeting next week. Producer input prices in New Zealand increased 3.6% quarter-over-quarter in the first three months of 2022 while near-term inflation expectations grew in the second quarter of 2022, with firms anticipating annual inflation of 4.9 percent in the coming year, up from 4.4 percent in the previous survey. Kiwi also benefited from lifted restrictions in Shanghai which will enable additional enterprises in zero-Covid regions to resume normal operations from the start of June. In the coming week, Reserve Bank of New Zealand will meet on May 25 with markets anticipating interest rates to reach 2% to rein in inflation.

6. Loonie traded at around 1.284 against the greenback amid a pullback in the Dollar. On the data front, food and shelter prices drove Canada’s annual inflation rate to 6.8% in April 2022, the highest since January 1991. Rising energy and commodity prices which could pressure the BOC to maintain its hawkish stance to keep inflation in check. Meanwhile, oil prices topped $113 per barrel buoyed by optimism as China signalled an end to its lockdown and EU resolved issues over how EU countries might pay for Russian gas while remaining compliant with sanctions. On the data front, US crude oil inventories unexpectedly declined by 3.394 million barrels in the week ending May 13th, compared to market forecasts of a 1.383 million increase. Elsewhere, gold headed for its first weekly gain since mid-April to close at around $1,846 an ounce, as the bullion benefited from safe-haven flow and hedge against inflation.

Salzworth Asset Management