What Happened

• U.S. Dollar strengthening came to a halt in May, with the Bloomberg Dollar Spot Index experiencing a 2.0% decline for the month.
• China stepped up stimulus measures to reassure the globe it will stay on a growing path.
• Euro climbed back, after falling to a 5-year low, based on economic resilience in the face of war.
• Mexican Peso resurgence made it the best performer following Banxico’s interest-rate hike.
• All major peers fell to the Buck, with even the Japanese Yen mounting a 1.3% comeback.

GreenShootsFX’s View

• We hoped for a better May, and we got it as risk-appetite returned despite central bank tightening and interest-rate increases.
• European nations, having banned Russian oil imports, will need to find energy reassurance from other sources.
• Euro momentum could continue if European Central talk gets more hawkish.
• The end of the first half of the year will likely continue bringing bouts of volatility as long-term outlooks keep being revised.

In Focus

• MXN: The ups & downs of peso highlight the volatility of the global market.
• Commodity-based currencies have been climbing with Fed tightening priced in.
• The Buck started losing its dominance in the middle of May following a return to risk-appetite regardless of fears over negative headlines.
• Inflationary pressures remain, and central banks, like Banxico, are acting on combatting inflation, but the focus now is on growth.
• The International Monetary Fund admits how war and an uneven pandemic have challenged the global economy but sees no recession.
• Technology has taken a major hit, but all other services and products seem to be reviving.

In Depth

Inflation-wary markets turn sour on the dollar as fears wane, and the latter part of May addressed negative items that satisfied markets and sank USD.

We can say now that China woke up. The first half of the year has been mired in dovishness on the world’s second largest economy, while here in the U.S. the Fed has tried to increase borrowing costs to cool down the economy.

Indeed, their rate increases have worked with the housing market finally seeing prices slow down and the labor sector is also cutting down on hiring. Meanwhile, China has stepped up its response to a sluggish economy and admits responsibility for the headaches that have come about in the form of supply-chain chaos.

Although the COVID lockdowns exercised could continue, May was the month in which China’s leadership finally started getting worried that, for the first time since 1976, the “Cultural Revolution,” the U.S. could surpass its level of economic growth. So, it is now a game of easing here and tightening there.

While the U.S., and its immediate and regional neighbors rein in years of stimulus and pandemic aid, other areas such as Asia as European economies have looked for ways to keep an accommodative environment. The Federal Reserve has made it clear that it plans to hike multiple times throughout the year and is unlikely to deviate from it until consumers get a reprieve.

Data shows how negative people feel about the quickest pace of price growth in decades, with the University of Michigan Consumer Sentiment survey registering its lowest reading in 10 years. In addition, current buying conditions for Durable Goods as well as houses are making for a fearful outlook among common people. Nevertheless, it is worth noting that people feel better about the next five years; although uncertainty clouds a clear picture, people think their finances will eventually improve.

It is possible that the present feeling of ‘stagflation,’ that growth is anemic or non-existent while the price of everything keeps rising, will recede as the second half of the year gets going. By now, we know inflation has required a return to higher interest rates, we know Russia cannot be a reliable energy partner for Euro in the future, and we know the war has forced a rethink of multilateral cooperation to facilitate trade.

Perhaps this latest dynamic is improving the prospects of Latin American currencies and emerging-market currencies such as the South African Rand and the Polish Zloty. Moreover, military spending to grow in Europe is likely to positively affect the Eastern front. The U.S. has even reached out with an olive branch to Venezuela for potential oil trade.

When the Fed met at the start of the month, Chairman Jerome Powell’s press meeting comments gave equity markets the break they were seeking. Powell explained that the Fed wanted to be as clear with the market as possible. Now that 50-basis-points have been exercised, counting on a more aggressive hiking by 75-basis-points in any of the next meetings seems unnecessary. As a result, the moves did not meet the feared level of hawkishness that dominated risk-averse markets for weeks and the month turned out to be a gainer.

One big winner for the month was the Euro, as the shared currency roller-coastered from pessimism surrounding an embattled economy to potentially a growing asset because of continental resilience. While the war has shifted in priorities for Russia and the defense of Ukraine has been admirable, its toll has been priced-in, and only time can answer the questions surrounding a new energy future for Europe.

The European Union has gone ahead and partially banned oil imports, making some uncomfortable, but nonetheless, with a consensus that Russia must be cut off after its aggression.

Gross Domestic Product numbers also seem to suggest that the negative impact on the overall health of the Euro-zone was not contractionary, with revised Q1 GDP figures showing a 0.3% expansion. Indeed, the turnaround for the Euro from one half of May to the other was rapid after it dipped into the lowest value since 2017.

France and Germany have also revealed expanding Purchasing Managers Indices, indicating that the area has improved more than expected. We strongly believe Euro has room to grow and is far from the dire situation described by ECB member Fabio Panetta who doomed the ancient continent as going into “de-facto stagflation.” It looks to us that the shared currency will not be in parity with the U.S. Dollar anytime soon.

Even Fed President Powell believes that supply-chain stresses are easing. As China struggles, improvements have been slow, but firms and factories are gradually adjusting and making things happen.

We now question if there is potential for a rapid period of disinflation developing later in the year if inflation is credited to the pandemic’s supply-chain woes. In addition, it was noted by the Fed that some elements of Core Inflation looked to be weakening. If this affects the current dot-plot, we could see further sinking of the greenback across the board.