Markets are rethinking when and at what level Fed funds will peak, given continued concerns about an economic slowdown, and bond yields have plummeted. The dollar has retreated in the process, but we believe there is still some juice left in the dollar rise before it ends, as equity markets find some support. Another bout of bond selling might push the dollar to new highs, especially if risk sentiment deteriorates. Longer term, though, the dollar boom is clearly nearing its end.
Over the last month, the CAD has held its ground against the USD's surge. The CAD-oil correlation remains weak, and with decreasing commodity price volatility, relative yields are driving USD/CAD once more. The Bank of Canada is likely to raise interest rates by another 50 basis points in July, and the CAD rates market pricing for this year is fairly comparable to the Fed's expectations. This should help stabilize the rate disparity, implying that the CAD will trend sideways in the months ahead.
The elephant in the room, Ukraine's war, is no longer generating headlines, but it still has the potential to trigger severe euro depreciation. Even though the longer-term forecast is for a rebound to 1.10-1.30 as the ECB strives to bring rates above zero, the uncertainty makes EUR/USD direction exceedingly dangerous.
The pound has dropped significantly, but the news flow has been particularly damaging. The economy is stuttering under the weight of rising inflation, the balance of payments is in shambles, and the administration is under fire. For the rest of the year, we believe the GBP will trade lower than present levels, with the possibility of a rise if the situation in Ukraine improves.
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