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Weekly market update 29th April – Dollar maintained its strength for the month of April while commodity currencies continued to slide amidst geopolitical uncertainties

Weekly market update 29th April – Dollar maintained its strength for the month of April while commodity currencies continued to slide amidst geopolitical uncertainties

1. The Dollar Index maintained its strength in the last week of April, easing to about the 103 level before Friday’s market close. Overall, the U.S. dollar gained 5% and posted its best monthly performance in nearly a decade in the month of April. General market consensus is that the U.S. Federal Reserve will be raising interest rates by about 50 basis points in the coming week’s meeting, as well as equivalent rate hikes in the upcoming policy meetings, in response to soaring inflation. Weaker-than-expected quarterly U.S. growth data was reported last Thursday, but it did not hinder the dollar’s rise as investors maintained their position on interest rate bets. In the coming week, investors will be looking out for the U.S. Federal Reserve meeting as confirmation of interest rate expectations, as well as Nonfarm Payrolls data for an idea of the U.S. jobs market’s performance in the month of April.

2. Euro continued to weaken towards the 1.05 level against the greenback. Investors are accepting that the European Central Bank would not be able to raise interest rates as quickly as the U.S. Federal Reserve as they seek to balance the worsening inflationary pressures and slowing growth triggered by the war between Ukraine and Russia. While the Fed is expected to continue hiking rates, the ECB is only expected to start raising interest rates only in July. The latest data also showed that consumer sentiment reached record lows in Germany, reflecting poor sentiment in the bloc.

3. On the other side of the Atlantic, the Sterling also depreciated against the greenback to about the 1.25 level. The currency continues to be weighed down by poor economic data and expectations of a less hawkish stance by the Bank of England. Retail sales in the U.K. tumbled by 1.4%, which was much worse than market expectations of a 0.3% decrease. The Gfk consumer confidence indicator also reached record lows in April. PMI data also showed that economic growth in the U.K. has slowed down during April, with service providers experiencing a considerable loss of momentum and manufacturers facing a headwind to order books from rising output charges. BOE Governor Andrew Bailey has also warned of a possible recession and a slowdown in the labour market as well. In the coming week, investors will be looking out for the monetary policy report from the BOE, with markets expecting a 160 basis points hike by the end of the year.

4. Commodity currencies also underperformed against the stronger U.S. Dollar amidst global concerns over the Russian-Ukrainian crisis. The Aussie held below the 0.710 level and the Kiwi also similarly held below the 0.650 level. Australia’s inflation rate surged 5.1% in the 1st quarter of 2022, which was much faster than the 4.6% expectation and marked the highest reading in the past 20 years. This supported market expectations for the Reserve Bank of Australia to start tightening monetary policy soon in response to inflationary pressures. With the RBA’s monetary policy meeting scheduled in the coming week, investors are expecting a 25 basis points increase in borrowing costs to curb soaring inflation and a tight labour market. The Reserve Bank of New Zealand, on the other hand, has raised its benchmark interest rate by 50 basis points in April. Yet, the RBNZ is still seen to be lagging behind in tightening monetary policy compared to the U.S. The Loonie also depreciated against the U.S. dollar, as Canada’s inflation rate in March hit a 31-year high of 6.7%, prompting market expectations for the Bank of Canada to tighten monetary policy much more. Going into the next week, investors will be watching out for the RBA rate statement and unemployment rate data from Canada.

5. WTI crude futures are up about 9% in April and closed off the month around the $105 level, as the market continues to go through a volatile period marked by geopolitically driven supply disruptions and demand slowdowns from China as the country continues to face lockdowns. Furthermore, the EU is inching towards a ban on Russian crude imports, which would further drive oil prices upwards in the coming months. Also, China has extended mass testing to more cities and lockdowns continue to hit oil demand from the world’s biggest crude importer. On the other hand, gold prices are hovering around the $1,900 level, but the commodity is set to end the month lower as aggressive bets for higher interest rates from the Fed continued to dampen gold’s appeal. However, investors continue to be concerned about soaring inflation and supply chain issues, which could support the safe haven’s demand. As such, gold’s outlook remains mixed in the coming months.

Salzworth Asset Management