The USD remains the high-yielding, safe-haven king of G10 currencies. That said, the price action in the wake of the March FOMC meeting has highlighted that there are limits to which its growth rate advantage can support the USD across the board. The Fed delivered a 25bp hike, ‘confirmed’ that six additional hikes can come later on in 2022, pointed at more aggressive tightening in 2023 and pushed against the market rate cut expectations for 2024. Key for the near-term USD outlook would be the Fed’s ability to convince the markets that their long-term tightening plans are credible. Focus today will be speeches by the Fed’s Thomas Barkin and Michelle Bowman. Another USD driver will be the resilience of global risk sentiment, which in turn will depend on the evolving conflict between Ukraine and Russia. In all, while we believe that the USD should hold onto its recent gains for now, we acknowledge that the risks to the reign of King USD have started to grow of late.
The CAD was not able to make up as much ground as the other commodity FX yesterday, despite the sharp rebound in oil. Yet, USD/CAD has returned to the lower end of its 1.26/1.29 range, while a comprehensive catalyst may still be needed for an eventual breakout. It is unlikely to come from today’s set of Canadian macro releases. Retail sales are expected to register a decent bounce-back following the December contraction, while perhaps more importantly for the CAD it will be interesting to see whether Canada continued to enjoy sustained net portfolio inflows from foreigners. While the publication has never been a potent near-term driver for the CAD, it could still nicely complement evidence of widening trade surplus to strengthen the long-term support of Canada’s broad basic balance. This comes in stark contrast to the deteriorating US position, as this divergence remains the main fundamental reason for the CAD to gradually outperform the USD after the Fed hinted at a similarly fast start to its tightening cycle as the BoC.
Dutch central bank governor, Klaas Knot, was the latest member of the ECB to say that further EUR/USD weakness would be unwelcome as Europe deals with an energy supply shock. Most suspect that EUR/USD will stay weak this summer and that will end up dragging the ECB into a more hawkish position. On the subject of EUR/USD staying weak, it will be interesting to see the eurozone January trade figures. The December 2021 figure showed a record monthly deficit of EUR9.6bn. Consensus expects a narrowing of the deficit to EUR9bn in January. However, another blowout deficit should serve as a reminder that the eurozone's current account surplus is under heavy pressure on energy imports. Look for the EUR/USD drift back to 1.10 in these uncertain times.
Unlike the Fed, the BoE delivered a cautious 25bp rate hike yesterday, with one dissenter voting for unchanged rates. The market removed roughly one 25bp hike from its expectations this year (Bank Rate now priced at 1.90% in December). GBP held up reasonably well - largely because the dollar was having a bad day and the view that if the BoE is worried about what the energy shock means for consumption. Look for the GBP to continue to remain under pressure in the medium term.
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