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DXY appreciated 0.9% to 104.75, above the 103.30 peak in December 2016 but failed to close above 104.87, the top of a price channel. The fundamentals driving this strong USD have weakened. Fed Chair Jerome Powell admitted that the Fed was late in tightening monetary policy and was unwilling to guarantee that restoring price stability would avoid a recession resulting in job losses. The USD’s appreciation since early 2021 has been accompanied by record trade deficits that were wide enough to offset domestic demand for advanced GDP to contract by an annualized 1.4% QoQ in 1Q22. Although nonfarm payrolls were stronger-than-expected in April, the unemployment rate did not fall and remained at 3.6%, the same as March. Moreover, other high-frequency labour statistics also disappointed including another above-200k reading in initial jobless claims yesterday. The Dow, S&P and Nasdaq Composite indices have lost 12.7%, 17.5% and 27.3% of their values this year.
Powell backed 50 hikes at the next two FOMC meetings on 15 June and 27 July. However, the US Treasury 10Y yield eased a fourth session by 7.3 bps to 2.85% while 2Y fell 7.8 bps to 2.56%, back at their late April levels inside the Fed’s collective 2-3% neutral range. While CPI and PPI inflation have remained high, they might have also peaked. Hence, pay attention to today’s University of Michigan Survey for signs of inflation expectations topping out. As things stand, the greenback is also looking at losing one of its pillar of support – the Blue Wave in Congress – at the November mid-term elections.
EUR depreciated 1.3% to 1.0380, its lowest close since 2 January 2003. EUR still needs to close the week below the 1.04-1.06 range seen in 2015-2016 to cement its downside momentum. One of our assumptions for the EUR’s depreciation has weakened substantially. The European Central Bank no longer resists pressure to join the Fed in normalizing monetary policy. ECB President Christine Lagarde has joined her colleagues in calling for an end to net asset purchases and a start to rate hikes in July. The EU 2Y bond yield has already turned positive in April in anticipation of the ECB returning the -0.5% deposit facility rate above 0% by end-2022. On 17 May, Eurozone is expected to report positive GDP growth (consensus: 0.2% QoQ) in 1Q22, in contrast to the negative US growth. If so, the Eurozone is likely to come across as resilient in the face of the Russia-Ukraine crisis.
Quote of the day
“The question whether we can execute a soft landing or not – it may actually depend on factors that we don’t control.”
Fed Chair Jerome Powell
13 May in history
In 2019, Nature Geoscience published a new study showing the moon was still shrinking.
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