09 May 2022 – Daily FX Update

Overview

U.S. Dollar at two decades high

Safety is what investors seek

Gold is at a critical level

FOREX

U.S. Dollar Index (USDX)

The dollar hit a two-decade high on Monday as investors searched for safety and yield in the face of growing concern over slowing global economic growth and rising interest rates. The Dollar Index gained 0.5% to 104.170, rising to levels not seen in 20 years after rising for a fifth week in a row last week.

The dollar’s gains were set against sliding stock markets and sent it ahead against other havens, commodity currencies, and emerging market currencies alike. The yield on benchmark 10-year U.S. government bonds has climbed a staggering 163 basis points this year and taken the dollar with it.

Speculation that Russian President Vladimir Putin might declare war on Ukraine to call up reserves during his speech at “Victory Day” celebrations also hurt market sentiment. Putin has so far characterized Russia’s actions in Ukraine as a “special military operation”, not a war, or an invasion.

Euro (EURUSD)

The common currency traded is 0.3% lower at 1.0516 as market participants grow increasingly concerned over a global economic slowdown. In a report published over the weekend, the International Monetary Fund warned that global growth could continue to slow for the rest of the year and inflation could run higher than expected. 

“This may be most salient for parts of Europe, given their relatively higher reliance on Russian energy imports,” the IMF noted.

In the meantime, European Central Bank (ECB) Governing Council member Olli Rehn reiterated that July could be the right time to start raising the policy rate, but this comment had little to no impact on the euro’s valuation. In the absence of high-impact macroeconomic data releases, the risk perception should continue to drive the action in financial markets.

Indices

U.S. Indices

Dow futures declined during overnight trading following a volatile week of trading after Federal Reserve policymakers raised interest rates by a half percentage point while signaling more hikes of the same size.

Dow Jones Futures were down 0.5% while S&P 500 Futures and Nasdaq 100 Futures were each trading 0.6% lower.

Market participants will also be looking ahead to Wednesday’s April consumer price index amid expectations of an 8.1% increase year-over-year, easing from March’s reading of 8.5%. The producer price index, which is a gauge of wholesale prices, is released Thursday.

During last week’s trade, the NASDAQ Composite lost 1.54%, the S&P 500 lost 0.21% and the Dow Jones Industrial Average fell 0.24%, respectively. It was the sixth straight losing week for the Dow, and the fifth straight for the other two major indexes.

European Indices

European stock markets are expected to open lower Monday as investors continue to fret about slowing global growth and central banks tighten monetary policy to combat soaring inflation.

The DAX futures contract in Germany traded 0.6% lower, CAC 40 futures in France dropped 1%, and the FTSE 100 futures contract in the U.K. fell 0.7%.

The Bank of England also raised interest rates, for the fourth meeting in a row, while policymakers at the European Central Bank have started talking more openly about hiking rates, potentially starting in July.

The ECB should hike interest rates as many as three times this year to combat inflation, Austrian central bank governor Robert Holzmann, a known hawk, said in a newspaper interview over the weekend.

This week sees the release of Germany’s ZEW sentiment index and preliminary first-quarter GDP data from the U.K., and these are likely to point to slowing growth in two of Europe’s largest economies.

Asian Indices

Asian shares slid and the dollar hit two-decade peaks on Monday as U.S. stock futures extended their decline on rate worries, while a tightening lockdown in Shanghai stoked concerns about global economic growth and recession.

Chinese trade data for April were not quite below expectations, with exports up 3.9% on the year and imports flat. However, there was no let-up in China’s zero-COVID policy with Shanghai tightening the city-wide COVID lockdown for 25 million residents. Chinese blue chips eased 0.8%, while the yuan touched another 18-month low to trade at 6.7049 per dollar. The Hong Kong Hang Seng lost 3.81%.

Japan stocks were lower after the close on Monday, as losses in the Gas & Water, Construction, and Services sectors led shares lower.

At the close in Tokyo, the Nikkei 225 declined 2.53% to hit a new 1-month low. The Nikkei Volatility, which measures the implied volatility of Nikkei 225 options, was up 11.01% to 27.83 a new 1-month high.

Metals

Gold has eased by 0.50% today in Asia to USD 1,874.00 an ounce, erasing Friday’s modest 0.35% gain. There are some constructive notes in gold’s recent price action. It is holding up remarkably well versus a rampant U.S. dollar and a US yield curve where a lot of it starts with three in yield terms. 

Meanwhile, for the week ahead, other than today’s Chinese trade data, the focus will be on US inflation data and Fed speakers. Analysts at TD Securities argue that core prices likely stayed strong in April, regaining momentum to 0.5% m/m after recording 0.3% in March.

A slew of Fed officials will be providing remarks in the upcoming week following the May meeting. New York Fed’s John Williams and Governor Christopher Waller’s remarks will be important and would be expected to shed some light after Fed Chairman Jerome Powell’s presser last week that failed to offer much in the way of clarity on what the Fed will do after frontloading rate hikes until neutral. 

Crude Oil

Oil prices slipped on Monday, sparked by weak China data and fears a global recession. Furthermore, investors eying European Union talks on a Russian oil embargo that could tighten global supplies.

Brent crude lost 41 cents, or 0.4%, to $111.98 a barrel. U.S. West Texas Intermediate crude was at $109.24 a barrel, down 53 cents, or 0.5%. Both contracts briefly turned positive after falling more than $1 earlier in the session. China’s crude imports rose nearly 7% in April although imports for the first four months fell 4.8% on the year.