USD: April retail sales should keep dollar supported
After quite a month in financial markets which saw global equity markets fall 15% and USD/CNY spike 6%, it seems like we are entering a period of consolidation. At the epicentre of that unease has been China, where lockdowns have seen Chinese and global growth forecasts cut. The lockdown strategy by Chinese authorities seems unlikely to change anytime soon, but there is some very short-term optimism that the residents and workers of Shanghai might be released after three days without a new Covid case. That news has -seen USD/CNY and USD/CNH start to stabilise and one-month USD/CNH traded volatility drop to 6.3% from levels above 8% only a week ago.
Given that the sharp adjustment lower in the renminbi had hit emerging market FX and commodity currencies in general, while helping the dollar, one could now expect a very short-term reversal of those trades. Two currencies we would favour in this temporary recovery would be the Canadian dollar (CAD) and the Norwegian krona (NOK). Both have been hit hard by the renminbi-inspired sell-off, but both continue to enjoy strong terms of trade gains with Brent still trading above $110/bl. USD/CAD can continue this correction to 1.2715/50, while USD/NOK could correct a little further to the 9.60 area.
However, pockets of recovery in oversold commodity currencies should not be confused for a major turnaround in the dollar. Our debt strategy team still calls for some further bearish steepening of the US yield curve and the US 10-year real yield pushing to +100bp over coming months - from +20bp today. This will continue to pose a challenge for equity and credit markets and we would view this week's recovery in both as a pause in a bear trend rather than a meaningful reversal.
Also, today look out for US April retail sales and industrial production, both of which are expected to come in strong. We will also hear from Federal Reserve hawk James Bullard at 14CET and Chair Jerome Powell at 20CET. It seems too early in the tightening cycle for the Fed to be fighting market expectations of tightening and the dollar could in fact be a little stronger tomorrow after Powell's remarks tonight. But for today's session, we favour consolidation and a few recovery stories.
DXY could correct a little lower today, but the 103.40 area could be too far.
|