US budget and deficits are bad news for the dollar
USD: Driving FX markets recently have been re-opening stories and whether central banks feel comfortable in discussing monetary normalization plans. Yet today should see some focus on US deficits. Apparently, the Biden administration will release fully costed budget plans, including $6trn in federal spending for FY22, annual budget deficits for a decade in excess of $1.3trn and a US debt to GDP rising to 117%.
In addition to the fiscal side, today sees the advanced US trade data for April. A monthly record deficit of $92bn is expected as the US consumption boom plays out. Large twin US deficits could be easily financed if the dollar offered attractive relative returns. But at this stage in the recovery cycle, there is an increasing number of attractive alternatives overseas. Today we'll also see some PCE spending and deflator data for April, but that looks unlikely to move markets. We would expect to see this little corrective bounce in DXY stall in the 90.20/25 area. A close above that would not be part of the short-term plan.
CAD: The CAD is little changed in quiet trade. Softer crude is an impediment for the CAD while some narrowing in US/ Canada spreads over the past week perhaps represents a more significant drag on the CAD’s performance. While these developments are a restraint on the CAD in the short run, collectively, these factors remain at generally CAD-supportive levels; if the CAD can’t advance at the moment, most don’t expect any significant softening either.
EUR: The ECB doves seem to have done a good job of putting the kibosh on any idea of PEPP tapering at the June 10th meeting. The softening in EUR long-end rates has taken a little steam out of the EUR/USD rally, but we expect it to stay supported. EUR/USD is pressing some good intra-day support at 1.2140/2150.
GBP: The GBP has performed well over the last 24 hours on the back of comments by BoE dove, Vlieghe. He laid out three scenarios for the path of the UK economy and the BoE's response - yet the market only reacted to the hawkish scenario. News that the full re-opening of the UK economy in June is 'in the balance' may hold GBP back temporarily, though Cable now looks well supported at 1.4100.
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