US driven by risk sentiment; downside risk remains small
USD - US Dollar
The shockwaves that originated from the slump in US tech stocks yesterday seem to have been absorbed without too much trouble by global equity markets, although more signs of sentiment instability did take some steam off the rally in FX. The dollar has found some stabilization after a negative start to the week and should, for now, continue to trade primarily in line with swings in global risk sentiment. Yesterday, new home sales in the US dropped much more than consensus, a first sign of how higher interest rates are starting to impact the US economy. The data also increases the significance of today’s mortgage application numbers, where another big drop would likely fuel concerns about an economic slowdown. After all, construction makes up 4% of GDP and retail sales are correlated with housing activity.
When it comes to the Fed, markets will surely take a close look at the minutes from the May FOMC meeting today to gauge how much consensus there was about multiple 50bp increases over the summer and whether there were some dissents about ruling out 75bp hikes. Observe the USD/CAD chart.
CAD - Canadian Dollar
Strong gains in crude, a neutral-looking USD and improved risk appetite are combining to drive some decent gains in the CAD. Oil prices have provided the essential fuel for the CAD’s advance as interest rate spreads continue to compress amid rising US. We remain bullish on the CAD outlook.
EUR - Euro
EUR/USD broke the 1.0700 mark yesterday, as markets probably feared a wider drop in the eurozone PMIs, which instead came in only slightly below consensus. The combination of some easing in stagflation-related concerns, hawkish re-pricing of ECB rate expectations, and a weak dollar momentum have all contributed to the recent EUR/USD rally. It appears most of the positives are in the price, especially considering that markets are already pricing in 100bp of ECB tightening by year-end, and we think a consolidation looks more likely than an extension of the rally to the 1.08-1.09 region. The eurozone calendar doesn’t include market-moving data releases today, but there is a long line of scheduled ECB speakers to keep an eye on.
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