What Happened

• U.S. Dollar weakness continued in May as the Bloomberg Dollar Spot Index fell 1.3%
• Pound Sterling reached a three-year best as the U.K. navigates through economic recovery as well as political concerns in a post-Brexit reality
• WTI Crude prices rose by 4.5%, which aided in pushing the Canadian Dollar to its strongest level since the start of 2015
• A combination of better inoculation efforts and recovering economy uplifted the Euro to its highest value since mid-January
• All-time record levels for the MSCI Emerging Market Currency Index climbing over 3.0%

GreenShootsFX’s View

• Greenback could find room to recover as Jobless Claims dropped below 400K for the first time since the pandemic began
• China’s central bank likely to counter CNY appreciation as currency is at its strongest level since mid-2018
• Mexican peso to be volatile as the country faces mid-term elections with constitutional and economic reforms on the line
• European Central Bank could impact euro value as they clarify stance on further aid
• Headlines are probably going to focus on a spending bill, but also competition with China

In Focus

• Covid-19 vaccine – rich nations are three years ahead in the inoculation race.
• Struggles around the world have exacerbated with slow roll-out.
• Delays in vaccine approvals and distribution have been common globally, impeding poorer economies from receiving help and recovering
• USD depreciation was caused by shockingly low non-farm payrolls for April
• Nevertheless, over half of the population have been vaccinated, and there are clear signs of economic momentum across America
• Japan and Taiwan have seen infections rise, indicative that we still have the battle to win

In Depth

USD could change direction swiftly as Covid-19 remains a headache globally although there’s no consensus on USD direction with fears of a stagnant recovery.

It has been over a year since the coronavirus showed up, and we are just starting to see light at the end of a very long tunnel. At the time of writing, mask-wearing requirements have been mostly lifted, following good news earlier in May that over half of the population nationally had received one of the doses of the vaccines available to the public. However, we must consider ourselves very lucky.

Reports lately have been of excruciating situations around various regions of the world, which have also been accompanied by worsening pre-COVID international relations regarding borders, taxes, and even violence.

As we enter the summer, we hope that the Olympics and soccer tournaments provide a respite for all countries, despite concerns over Japan’s ability to maintain athletes’ safety after a spike in infections and Latin America’s political instability as of late.

It feels like the buck should be playing a safe-haven role at the moment with so many fires globally, but there is no single narrative for USD right now. While Argentina, Chile, and Peru saw their currencies falter in May, Colombian peso (COP) and Brazilian real (BRL) somehow managed to mount a comeback averaging 3.5%. This did indeed happen as headlines from both countries point at socioeconomic problems that have been exacerbated by insufficient government response to the virus and its effects.

Scandinavian nations are also not in sync with Swedish krona advancing almost 1.5%, while the Norwegian krone went the opposite way by half a percent. In fact, even the rise in oil prices of over 8.0% failed to move NOK the way it helped other petro-currencies such as CAD and MXN.

Meanwhile, the greenback dominated across Asian currencies with news that both industrialized and developing countries are seeing COVID-19 cause ongoing damage. In turn, this has also represented a negative development for the Australian dollar, dependent on China’s demand and the global recovery narrative.

So, where is the dollar headed? It has become challenging to get much guidance as there are various opinions about where inflation is going and how that could be an incentive for a major market sell-off. One thing that is true is that the buck crashed below its 2021 uptrend. Another fact is that the percentage of U.S. dollars in global foreign currency reserves is at its lowest point in 25 years. Q4 of 2020 saw it fall to 59.0% after registering at 61.0% in Q2.

When it comes to the Fed, it looks like Chairman Jerome Powell and other members are maintaining their stance over keeping an accommodative financial environment, mainly because the goal is to see employment rise much more significantly. Remember that some of these officials were present when years ago it felt like the worst effects of the Great Recession had been left behind and tapering, along with interest rate increments, were utilized. Lessons have been learned from pulling the plug too quickly and not awaiting stronger overall growth.

There are a few reasons why inflation is not a concern for the Fed, primarily one being that a faster pace of inflationary growth was already in their expectations. As often mentioned, labor is the most important sector right now and the Fed is not kidding when it says it looks forward to meeting full employment before even considering tighter policy measures.

Although there have been some upticks in payrolls added and fewer initial jobless claims, labor is still slacking. Also, though some raw materials and commodities have indeed seen higher prices, there is price stickiness across industries that refuse to hike their final prices and incur higher production costs.

No doubt things such as vehicles are seeing prices rise because of the microchip shortage, but disruptive technology has allowed for competition in prices for other products to remain. You cannot discount the pricing power sustained by major retailers who still sell cheap. Ultimately, the pandemic allowed for a very low base, so inflationary progress is inevitable after the shock to the system caused by the sudden existence of a deadly virus.

Perhaps the biggest risk down the line is deflation, especially since many assets are valued at record highs and could come down dramatically, thus causing havoc over labor cost if consumer and investor demand starts falling. Nevertheless, Purchasing Managers Index has gone above expectation and consistently climbed, giving credit to a stronger American economy and materializing in USD return to gains.

On the Euro side, the European Central Bank may see a need to loosen further with EU Governing Council member Villeroy de Galhau stating that the negative Deposit Rate at (-0.5%) is not a bottom. The EU must deal with sanctions against Belarus after the scandal behind a forced plane landing for a politically fueled arrest. We worry about Switzerland ditching a comprehensive partnership with the EU since the U.K. has a 23.1% in total losses after Brexit in traded goods with the EU. The tables could turn.