USD: April retail sales should keep the dollar supported
After a strong month in financial markets which saw global equity markets fall 15% and USD/CNY climb 6%, it looks like we are entering a period of consolidation. At the epicenter of this malaise is China, where lockdowns have seen Chinese and global growth forecasts reduced. The Chinese authorities’ lockdown strategy appears unlikely to change anytime soon, but there is very short-term optimism that Shanghai residents and workers may be released after three days with no new Covid cases. This news saw USD/CNY and USD/CNH begin to stabilize and USD/CNH 1-month trading volatility drops to 6.3% from levels above 8% just a month ago. week.
Since the sharp downward adjustment of the renminbi had hit emerging market currencies and commodity currencies in general, while helping the dollar, we could now expect a very short-term reversal of these transactions. . Two currencies that we would favor in this temporary recovery would be the Canadian dollar (CAD) and the Norwegian krone (NOK). Both have been hit hard by the renminbi-inspired selloff, but both continue to enjoy strong terms-of-trade gains, with Brent still trading above $110/bl. USD/CAD may continue this correction as far as 1.2715/50, while USD/NOK may correct further to the 9.60 area.
However, pockets of recovery in oversold commodity currencies should not be confused with a major USD reversal. Our debt strategy team still expects further bearish steepening of the US yield curve and US 10-year real yield reaching +100bps over the next few months – from +20bps today . This will continue to challenge equity and credit markets and we would view this week’s rally in either case as a break in a downtrend rather than a significant reversal.
Also, watch today for US retail sales and industrial production in April, both of which should be strong. We will also hear from Federal Reserve hawk James Bullard at 14CET and Chairman Jerome Powell at 20CET. It seems too early in the tightening cycle for the Fed to fight market tightening expectations and the dollar may actually be a bit stronger tomorrow after Powell’s remarks tonight. But for today’s session, we favor consolidation and some recovery stories.
DXY might correct a little lower today, but the 103.40 area might be too far.