The Dollar Remains Cheap Against Most G10 Currencies
USD - US Dollar
Yesterday, we saw some big moves in FX as some advancement in peace negotiations between Russia and Ukraine prompted markets to unwind some of their defensive long dollar positions. At this stage, we doubt there is much geopolitical risk premium left in most assets, as markets appear to have taken an optimistic stance well before peace talks have yielded any result. The dollar remains cheap against most G10 currencies. This, in our view, means that once the dust has settled, the dollar remains in a position to emerge as an outperformer beyond the very near term, mostly thanks to the Fed accelerating the pace of tightening: we currently expect a 50bp hike in both May and June. We think that this Friday’s jobs data will endorse our call. On this topic, ADP payrolls (a 450k increase is expected) today will help shape the market’s expectations ahead of the nonfarm payrolls on Friday.
CAD - Canadian Dollar
The CAD’s sell-off correlated to the drop in oil prices has all but fully reversed even with WTI prices remaining well below recent highs. The CAD rebound reflects a strong, underlying resilience that has emerged as domestic yields have kept pace with rising US bond rates and commodity prices remain generally elevated. Domestic fundamentals continue to remain very strong both on employment and economic growth. Most continue to see a stronger loonie in Q2 possibly targeting 1.21. Observe the USD/CAD trends.
EUR - Euro
EUR/USD rallied by more than 1% yesterday on the back of optimism around a peaceful resolution of the Ukraine war. Geopolitical risk now appears almost fully priced out, while rate differentials and other fundamentals point to a weakening in the pair. At the same time, the euro might get some support today from the March inflation readings in Germany and France. We’ll also hear from ECB President Christine Lagarde this morning. We think EUR/USD can hold around 1.1100 today, but we continue to see sizeable downside risks in the coming weeks.
GBP - British Pound
The recent re-pricing of the Bank of England tightening expectations seems to have left the pound in a vulnerable position and unable to truly benefit from the improvement in Ukraine-related risk sentiment. The GBP is trading at 0.8500 against the euro and around 1.3150 against the USD. The only highlight in the UK today is a speech by the BoE Deputy Governor Ben Broadbent.
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