FX Weekly Update – May 9th, 2022
Posted Under: Weekly updates
As China ‘stagflates’ and the U.S. tightens, the rest of the world has to adjust, and it is having a difficult time catching up. Post-pandemic risk-aversion is the current mood, which could maintain the greenback at these levels in the short-term. Things are messy for all outlooks as economists try figuring out where the economy will land in the next two quarters considering the path the Fed has set for quantitative tightening.
EUR: The euro remains in tight ranges as the globe prepares for a more independence-seeking European Union looking to form new energy sources to avoid Russia. Reports from the war front describe a situation of complete chaos that has left a lot of people homeless and looking to establish themselves in other countries. The EU now has to cope with humanitarian crisis along with a bleak short-term future based on the lack of global economic well-being.
As May moves along, we will watch out for any European Central Bank comments that could move the needle as well as any headlines that provide hope for peace or talks towards a resolution. In Russia, the invasion of Ukraine is being fomented as larger global conflict in which the world is actively negating Russia its rights. Further escalation is always on the radar.
GBP: Sterling has stopped the bleeding from now following a terrible end of the week that put in doubt the U.K.’s ability to prevent a recession. Per the Bank of England, interest rate hikes have been and will be necessary to combat inflation, but the view on economic restrengthening is that it will take a while, perhaps getting through 2023 until seeing some growth in domestic product. As the global powers struggle and even major stocks suffer losses in value, expect the buck to simply stay buoyant and keep a steady level, but any surprises that come on the side of positivity and optimism will sink it as it is now fully priced-in the Fed will gradually make moves.
JPY: The Japanese Yen closed 0.28% lower in the previous session against the greenback. In the recent news, The Jibun Bank Japan Services PMI was revised higher to 50.7 in April 2022 from 50.5 in flash data and 49.4 in March. In addition, the Jibun Bank Japan Composite PMI was 51.1 in April 2022, up from 50.9 in March and a final 50.3 in February. This was the second consecutive month of growth in private sector activity, and the fastest since last December, indicating the relaxation of COVID-19 restrictions, which allowed enterprises to operate more freely. In other news, the Nikkei 225 Index fell 2.53%, while the broader Topix Index fell 1.96% on Monday, giving up gains from the previous session and following an early slide in U.S. equity futures, as investors weighed tighter monetary policy globally against the backdrop of high inflation and a challenging growth outlook.
CAD: The Loonie closed 0.32% lower in the previous session before extending its losses on Monday morning. The Loonie fell to a 19-week low against the U.S. dollar, as robust job market statistics in the U.S. raised expectations of further Fed monetary policy tightening. Domestically, the Bank of Canada is expected to maintain its hawkish posture, despite Canadian unemployment reaching a historic low of 5.2% in April. Governor Macklem stated that the Bank of Canada is willing to raise interest rates “forcibly if necessary” to combat growing consumer prices. In March, annual inflation rose faster than projected, reaching a 31-year high of 6.7%. The Bank of Canada has already raised its overnight rate target by 125 basis points to 1% this year and has foreshadowed more hikes as the economy enters excess demand and inflation remains well above the target.
MXN: The Mexican Peso closed 0.56% higher in the previous session before losing its momentum slightly against the greenback on Monday morning. In doing so, the Mexican Peso traded up from a 6-week low after state oil firm Pemex reported a $6.17 billion first-quarter net profit, reversing the previous year’s losses. Furthermore, In terms of monetary policy, Mexico’s central bank raised interest rates for the seventh time in a row in March, to 6.5%, in an effort to reduce inflationary pressures caused by the Ukraine conflict. In other news, Mexico’s President Andres Manuel Lopez Obrador announced on Sunday that he will ask U.S. President Joe Biden to include Cuba in the next Summit of the Americas.
CNY: The Chinese Yuan closed 0.10% lower against the greenback in the previous session. On Monday, the Yuan sank against the U.S. dollar, reaching new 18-month lows and extending significant losses from April, as concerns about a global economic slowdown and forecasts of increased interest rates throughout the world drove investors into the safety of the dollar. China’s uncompromising dedication to its zero-tolerance attitude to Covid weighed on the currency as Shanghai authorities prolonged lockout restrictions until late May, while Beijing increased mass testing into an almost daily habit. According to the most recent data, Chinese export growth dropped to its slowest in nearly two years in April, while imports barely changed as tighter and wider Covid-19 regulations stalled manufacturing production and hurt domestic demand. Elsewhere, economists are lowering their full-year GDP growth prediction for China to reflect the economic damage caused by the country’s Covid issue, putting negative pressure on the currency.