Weekly market update 8th April – Dollar outperformed its peers on Fed’s hawkish comments, oil prices set for a second week of decline after IEA agreement

Weekly market update 8th April – Dollar outperformed its peers on Fed’s hawkish comments, oil prices set for a second week of decline after IEA agreement

1. The U.S. Dollar Index climbed close to the 100 level which has not been seen since May 2020, after gaining 1.5% over the week to record its biggest advance in over a month. This comes after the release of FOMC meeting minutes during the week, which revealed that many participants were ready to hike rates in 50 bps increments in the coming months and reduce the central bank’s massive balance sheet from May onwards. As uncertainty continues to plague markets with the Ukrainian-Russian conflict persisting and sanctions on Russia expected to be imposed sometime soon, it could further boost demand for the safe-haven dollar. As such, the U.S. dollar is expected to maintain its strength against its peers going forward. In the coming week, investors will be looking out for CPI data for a gauge on persisting inflationary pressures in the U.S., as well as PPI and core retail sales data due to be released near the end of the week.

2. The Euro and Pound both underperformed against the stronger greenback, extending its decline. The Euro languished near the $1.08 level, edging closer to a 2-year low. Investors are generally concerned about the Ukrainian-Russian crisis and surging commodity prices, and how these events will hit economic growth in the region. Additionally, there is growing political uncertainty in France as it heads into the first round of presidential elections on Sunday. Incumbent president Emmanuel Macron has a lead over his far-right rival Marine Le Pen, but the gap has narrowed sharply in the past weeks. The latest ECB meeting minutes also showed that a majority of policymakers wanted an immediate normalisation of policy given strong inflationary pressures within the bloc. As such, the Euro is not expected to recover in the short-term outlook. On the other side of the Atlantic, the Sterling also depreciated to around $1.30 against the Dollar. The BOE softened its tone on monetary policy in the latest March meeting, with one policymaker ready to keep rates unchanged. Going forward, as BOE delivered its third consecutive rate hike in March this year, the outlook on monetary policy in the U.K. is not expected to change significantly, but much of the direction is still dependent on the central bank. Investors will be looking out for CPI data from the U.K. to gauge inflationary pressures, which is expected to guide the central bank’s direction on monetary policy since current 30-year high inflation levels are a key point of concern for the BOE.

3. Commodity currencies also suffered and depreciated against the Dollar over the week, as markets continued to price in the prospect of more aggressive tightening of monetary policy by the Federal Reserve. The Aussie held below the $0.75 level over the week, while the Kiwi weakened past the $0.69 level by Friday’s market close. Investors are watching out for the upcoming RBNZ interest rate statement for a clearer understanding of the central bank’s stance of monetary policy going forward. General market expectations are for the RBNZ to hike rates by a modest 25 bps. Also, investors will be keeping an eye on Australia’s unemployment data release for an idea of how the labour market is recovering. Also, the Canadian dollar depreciated against the Dollar over the week. With Canada’s jobless rate edging lower to a new record low of 5.3% in March as the economy added 72,500 new jobs, many are expecting the BOC to hike rates yet again in the coming week, in line with other major central banks.

4. WTI crude futures saw a slight decline in the past week. The U.S. benchmark is down about 3% for the past week, amid plans for a major reserve release and worries over falling demand from top importer China as the country faces the largest wave of COVID-19 infections yet, triggering a lockdown. IEA member states have agreed to tap on 60 million barrels worth of strategic oil reserves, after the U.S. announced its own release of 180 million barrels to support the oil markets. Going forward, investors will be closely watching any potential sanctions on Russian energy and its expected impact on the oil markets. On the other hand, gold remained little changed over the week at about $1,940 per ounce. This comes as aggressive Federal Reserve tightening countered inflationary concerns. Going forward, as the Dollar continues to strengthen and interest rates are expected to rise, the appeal of the non-yielding asset is expected to wane in comparison to other asset classes.

Salzworth Asset Management