Just as there had been questions surrounding whether or not Hilary Clinton would be running for President, the period of consolidation in the greenback over the course of March and early April had many wondering whether the USD bull market had run its course. While it has been confirmed that Hilary is indeed running for President, the outlook for the greenback is still cloudy, though the technical and fundamental analysis suggest the big dollar is poised to break out of its consolidative phase. The soft labour report from two weeks ago along with the lower tracking estimates of Q1 GDP growth have pushed market expectations for the first rate hike so they are closer in line with our estimates of a September lift-off; however, the NFP surprise is likely an aberration as opposed to the start of a fundamental shift in the Fed’s outlook on monetary policy. FOMC voting member Williams, who is usually pegged as a notable dove, was speaking this morning and highlighted that he saw the risks of the Fed moving too early as being balanced with the risks the Fed moves too late, and that focus is now on the longer-run rate path. The risk to our assessment the first rate hike will come in September is the US labour market remains soft over the course of Q2 and inflation indicators begin to deteriorate from current levels, though we would place a low probability on the aforementioned materializing. On the technical side of things, the DXY looks to have formed a double-bottom and broken through the neckline late last week, and as a result the technical price objective associated with the break would put the USD-linked index into the low-100s, surpassing the high witnessed back in early March. The DXY has started the new trading week on its front foot, with the index up just under 0.5% as EURUSD is pushed into the mid-1.05s.
The overnight Asian session kicked-off with a bang, as Chinese trade balance data for the month of March shocked markets and raises red flags in regards to the state of global trade. In USD terms, China’s trade balance shrank to just over $3bn last month, led by a shocking collapse in exports of 15%, when the median analyst estimate had been for a gain of 12%. The dreadful pullback in export growth from the 48.3% gain in February is an ominous sign for GDP growth that is set to be released later this week, where there are already concerns of a downside risk to the 7.0% annualized print that is expected. Consequently, the sour trade balance numbers increased speculation there would be further efforts to underpin economic growth by juicing monetary policy conditions, and thus Chinese stock markets rallied with the Shanghai Comp increasing by 2.16%. Not so fortunate have been the commodity-linked currencies, with the aussie, kiwi, and loonie all losing ground against the big dollar as Chinese import growth slowed by 12.7% over the month of March, a worrisome string of reports for countries that are reliant on exports to China. The aussie has fallen almost a full big figure to change hands on the south side of the 0.76 level against the USD, with the antipodean currency likely to trade soft ahead of Chinese GDP figures Tuesday night, and the Australian employment report Wednesday night.
As we get set for the opening bell in North America, equity futures are suggesting a red start to the new trading week, while last week’s rig count report is helping crude start off the week with a heavy bid tone. With the US rig count falling to its lowest level since 2010, and questions still surrounding the Iranian nuclear deal and when oil supply from Iran will come online, front-month WTI is trading on the north side of $52. The rise in crude prices has helped buffer some of CAD’s early weakness on the back of a stronger USD and the deterioration in China’s trade balance, though USDCAD has broken into the low 1.26s ahead of the opening bell. We expect cautious trading in the loonie ahead of Wednesday’s BoC rate decision; though US retail sales and Chinese GDP figures could add to volatility ahead of the release, so make sure to speak to your dealing teams in regards to how best manage the associated volatility ahead of the rate announcement.
Further reading:
Buy USD/CAD Into BoC – Barclays Trade Of The Week
USDown or greenback comeback? And more – Market Movers #45
Share
