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DXY depreciated 0.9% to 103.28 and returned its post-FOMC rally. Dow and S&P 500 rose 1.3% and 2.0% respectively. Investors were relieved that US advanced retail sales continued to expand in April amidst better-than-expected industrial production and capacity utilization. The Nasdaq Composite index rallied 2.8%, following through on the tech rally in Asia from Chinese Vice Premier Liu He’s support for digital platform companies, a sign that Beijing may ease its clampdown on tech companies. CNY recovered 0.7% to 6.7377 per USD from last Friday’s 6.7893, its worst level since September 2020. The US Treasury 10Y yield firmed 10.4 bps to 2.986% but stayed below 3%. Fed Chair Jerome Powell affirmed that the Fed would keep hiking, above neutral (or 2% to 3%) if necessary, to bring down US inflation. However, St Louis Fed President James Bullard assured that markets have already priced the two 50 bps hikes expected in June and July.
European currencies performed best on Tuesday. GBP, EUR and CHF appreciated by 1.4%, 1.1% and 0.9% respectively. Instead of contracting like the US economy, 1Q22 GDP expanded 0.8% QoQ sa in the UK and 0.3% in the Eurozone. GBP could push above 1.25 after recovering the losses after the Bank of England meeting on 5 May. Apart from positive 1Q22 GDP growth eroding the BOE’s recession risk scenario, today’s CPI inflation could come in lower-than-expected in April (9.1% YoY consensus vs 7.0% previous) and dampen its expectation for double-digit inflation in late 2022. Following BOE Chief Economist Huw Pill’s warning that rising rates might dampen the property sector, consensus expects growth in the house price index to slow to 9.9% YoY March from 10.9% in February. EUR is firm after closing at 1.0550, above 1.05 for the first time three sessions.Klaas Knot became the first European Central Bank official to call for a larger 50 bps hike if Eurozone inflation broadens. With the door open for the -0.50% deposit facility rate to turn positive earlier instead of late 2022, the EU 2Y bond yield surged by 24 bps to 0.377%, its highest level since November 2011. The ECB is widely expected to end net asset purchases and hike rates in July.
Commodity currencies improved with risk appetite.AUD appreciated 0.8% to 0.7030, its first close above 0.70 since 6 May. Today, Australia’s wage growth might beat the consensus to rise to 2.5% YoY in 1Q22 from 0.7% in 4Q22. More companies face pressure to offer higher wages to attract and retain staff in the tight labour market. NZD strengthened 0.8% to 0.6359. Next week, we expect the Reserve of New Zealand to lift the official cash rate by another 50 bps to 2% on 25 May. CAD appreciated less by 0.3% to 1.2811per USD but extended its appreciation below 1.30 for the third session. Like the US, today’s CPI inflation in Canada is expected to slow to 0.5% MoM in April from 1.4% in March. Higher US bond yields and the risk rally lifted USD/JPY by 0.2% to 129.38, but they were not enough to push it above 130. Emerging Asian currencies, especially the KRW, can recover as pressures abate for USD/JPY, USD/CNY and US bond yields to rise.
Quote of the day
“Everything is changing. People are taking their comedians seriously and the politicians as a joke.”
Will Rogers
18 May in history
India became the sixth nation to explode an atomic bomb in 1974.
Topic
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