FX Market View #7

The US data released during the last week confirmed the market expectation of a rebounding economic recovery. However, despite the data behind a surging US economy, the situation for the Dollar is less than positive. The gains that we made by the greenback earlier in the week, could not be consolidated. As a consequence, the Dollar appears unable to hold on to any gains and build the upwards momentum to match the economic growth. The fact that US treasury yields fell sharply during the week when the economy accelerated and labour market strengthened did little to support the Dollar across the board.

There has been a clear shift in the underlying trend in the Dollar as we transition for the first to the second quarter of the year. During the first 3 months of the year the Dollar appreciated, however this trend has clearly changed in April. This indicates the growth in the US economy and labour market had been factored into the Dollar’s appreciation during the first quarter. Furthermore, since the US has been ahead of Europe with the vaccine rollouts and stimulus plans, the relative value of its currency to the bloc nations can seem over-bought. In this case the Euro will be the undervalued currency with near term strengthening trends.

As we head into the week the initial key releases are form the RBA and Bank of China. Both central banks will release the policy on domestic interest rates. Given the fact that underlying inflation is on the uptick globally, we will unlikely see any easing of credit conditions. However the regulatory may choose this moment to provide any clarity on future interest rate policy. Later in the week we will have monetary policy decisions from the Bank of Canada and the ECB. Strong data in the Canadian labour markets could see an announcement of a QE rollback. As for Europe, the high levels in virus infections will need to be addressed first before discussing changes to the stimulus programs.

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