Dollar pullback continues amid emerging market volatility
The US dollar continued its recent trend lower last week, falling modestly against every G10 currency save the
The moves there were, however, modest and most of the action took place in emerging markets. It was hard to
discern a theme, since the Brazilian real rose strongly but other Latin American currencies like the Chilean and
Colombian peso struggled. The worst performer was the Turkish lira, down over 4% as investors continue to
vote with their feet on Erdogan’s unorthodox monetary policy.
This week focus will be squarely on the Federal Reserve April meeting on Wednesday, although markets are
not expecting any significant changes either in policy or communications from the Fed. US GDP growth
(Thursday) and PCE inflation (Friday) are also key, as will be the Eurozone flash inflation report for April, also
Sterling largely looked past last week’s strong data out of the UK, which saw higher rates of inflation, house
prices and positive surprises in the April PMI indices of business activity and March retail sales. The latter, in
particular, came in much stronger-than-expected. This bodes very well for growth in the second quarter of the
year once taking into account that the data covered a period prior to the opening of high street shops in the
UK on 12th April.
The pound’s rally has been cut short for now by jitters over the upcoming Scottish parliament elections and the
potential for a second independence referendum there. Little news of any note this week means that sterling
will probably take its trading cues from elsewhere, notably the Federal Reserve meeting on Wednesday.
The improving tone in Eurozone economic data was confirmed last week by a very strong PMI report for the
month of April and continued improvement in vaccination rates. The ECB also stayed out of the way of the
euro rally by adding little new information in its April meeting.
Overall, we think that the string of very positive economic surprises that we have seen in the US will now have
its counterpart in the Eurozone, as lockdowns are progressively lifted and consumer pent up demand is felt,
particularly in the services sector. Consequently, we think that the euro rally has a way to go yet.
Wednesday’s meeting of the FOMC should be a non-event, with no changes to monetary policy settings and
little in the way of fresh communications from the Fed, particularly given that there will be no updated
economic or interest rate projections.
Far more interesting should be the two inflation-related data points this week. On Thursday, the GDP deflator
for the first quarter, and then on Friday the personal consumer expenditure deflator for March. We expect both
to continue the recent string of upward surprises in inflation data, which should start the next leg up in Treasury
yields. What will be the immediate dollar reaction to inflation surprises is less clear, however.
Last Monday, we pointed out that speculators’ futures positioning would be highly likely to turn CHF-negative
in the coming weeks and indeed, Friday’s data from CFTC confirmed that for the first time in more than a year
we’re seeing more bets in favor of a weaker franc than a stronger one.
This may be viewed as a milestone in a normalisation of the FX market situation after the pandemic gyrations of the past few quarters.
Overall, the franc ended last week somewhat lower against the euro and around the middle of G10
performance tracker. Lower US yields seem to be more or less balancing out recent improvements in risk
sentiment, at least for now. In addition to monitoring the latest pandemic news, this week we’ll focus on
economic prints, particularly sentiment data and Friday’s retail sales for March.
The Aussie dollar was the worst performing currency in the G10 last week, although it still managed to end the
week roughly where it began it versus the US dollar. One of the big concerns for investors remains Australia’s
so far disappointingly slow vaccine rollout that has seen only around 7 doses administered per 100 people.
Parliament voted in favour of a shift in vaccine strategy on Thursday, which will now see the Pfizer vaccine
restricted to over 50s, who will instead receive the AstraZeneca jab. Whether this helps speed up the pace of
vaccinations among the older population remains to be seen, but it looks increasingly clear that the
government will fall short of its initial target of delivering at least one jab to all of its citizens by October.
This week looks set to be a very quiet one, with very little macroeconomic data set for release out of Australia.
Wednesday’s Q1 inflation data runs on a bit of a lag and will therefore likely be largely overlooked by currency
traders. We instead think that shifts in commodity prices could be the main driver for AUD – we have already
seen a bit of a bounce in the currency so far this morning following an uptick in iron ore prices.
Arguably the biggest news story in FX last week was the hawkish turn taken by the Bank of Canada. The BoC
unexpectedly tapered its asset purchase programme by 1 billion CAD and brought forward its timetable for
interest rate hikes. Policymakers in Canada now expect the first hike to take place in the second half of 2022,
having previously said that this was unlikely to happen before 2023. With the country’s vaccine programme
now progressing well, the bank also see’s higher growth of 6.5% in 2021 versus the previous 4% estimate. This
is the first instance where we have seen a significantly more upbeat assessment from a major central bank since
the start of the COVID crisis and could pave the way for additional gains and an outperformance in the
Canadian dollar versus its peers in the coming weeks.
Retail sales data on Wednesday and the February GDP print on Friday will be the main economic data releases
in Canada this week. Yet, with both data points running on a bit of time lag, we could see investors pay more
attention to events elsewhere, namely Wednesday’s FOMC meeting.
The yuan continued to post gains against a broadly weaker US dollar last week, rallying back below the 6.50
level to its strongest position since mid-March. CNY had come under a bit of selling pressure last month as the
impressive vaccination rollout in the US caused a sharp move higher in long-term government bond yields. An
easing in this move in US rates, which has seen the 10-year yield drop back below the 1.6% level has, however,
provided room for a recovery rally in the yuan, which remains an attractive proposition for EM currency
investors. While the Q1 GDP data out earlier this month was a little bit of a disappointment, the
stronger-than-expected set of retail sales data for March suggests that the economy is gathering momentum
This Friday’s PMI data from NBS may receive some attention among currency traders, but we ultimately expect
the USD/CNY cross to be driven more by broad investor sentiment and the fallout of Wednesday’s FOMC