In the near term, the USD should remain supported by the relative outperformance of the US economy that will allow the Fed to normalize policy more quickly. The USD should further benefit from its role as a liquid safe-haven currency during recurrent bouts of risk aversion. Today the US will print non-farm payroll data for March - market consensus at 490K. This should be enough to help markets cement expectations around two 50bp rate hikes in May and June, providing further support to the greenback. Observe the foreign exchange rates.
CAD - Canadian Dollar
The boost to Canada’s terms of trade has more than offset the market jitters stemming from the Ukraine-Russia war. The energy markets risk being durably impacted and higher prices could subsequently linger for longer. Besides, the BoC is off to an earlier and faster-tightening start than the Fed in H122. Some gradual CAD outperformance could tentatively resume over the USD, while a significant cooling on the geopolitical front may be needed for CAD gains to become more entrenched. Observe the USD/CAD chart.
EUR - Euro
The war in Ukraine may fan the stagflation headwinds within the Eurozone. The EUR's relative rate disadvantage as well as the persistent geopolitical and economic risks can discourage foreign investors from returning to European capital markets for the near future while further worsening of the Eurozone external imbalances can reduce net demand for EUR by corporates. That said, we believe the geopolitical risks will delay rather than derail the economic recovery, keeping the ECB on the path of policy normalization in the coming months. The EUR should become a less attractive funding currency as a result and regain some ground in H222. We remain more constructive on the EUR in the long term also because we expect it to benefit from further recovery in global growth and trade that should reduce its growth disadvantage vs the USD.
GBP - British Pound
Soaring energy costs, labour market shortages, global supply chain disruptions and persistent Brexit uncertainty may continue to plague the UK economic recovery and hinder any BoE policy normalization in the face of uncomfortably high inflation. This could keep UK real rates and yields very negative and weigh on the GBP in the near term. The currency could further be vulnerable to spikes of risk aversion. In the longer term, the undervalued GBP may recover as UK growth hurdles disappear and this allows the BoE to hike rates. That said, the GBP could still be facing some downside risks including more Brexit rhetoric which will make the UK’s economic recovery less robust.
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