High Volatility Ahead for Currency Markets: Central Banks, OPEC+ and Russian sanctions by the EU
This week is full of high risk reports that are showing high volatility ahead for currency markets as central banks meet and employment data for Canada and the US are on tap. The high volatility this week will have an impact on the currency movements throughout the week, here is our weekly market update for May 2- May 6th.
The US dollar index reaches to 103.75 on the highs on Monday as all bets are that the FED will continue with its aggressive approach to its monetary policy and tackle its soaring inflation with a market expectation of raising its interest rate this week by 50 basis points with further plans to reduce its $9 trillion balance sheet as the FED concludes its two day meeting on Wednesday May 4th. The FED hasn’t seen a rate hike increase of 50 basis points in well over 20 years. The challenge for the Fed is to raise rates without stalling the economy. Investors are already looking ahead to the June and July meetings, which are also likely to impose 50 point hikes.as well.
China’s official manufacturing purchasing managers’ index fell to 47.4 and factory activity in April showing a contraction in industrial production with disrupted supply chains as the implications of the Zero Covid China lockdown continue, raising fears of a sharp economic slowdown in the second quarter that will weigh on global growth.
CANADIAN DOLLAR
Crude oil prices fell sharply in direct response to the economic data out of China and jumped back to the $105 levels on the back of the OPEC+ meeting this week. Thursday is OPEC+ meetings for output and production levels while the European Union is discussing a phase-out approach that would see Russian oil imports decline gradually until the end of the year, despite concerns that this would further boost oil prices. Decisions on sanctions need to be approved unanimously by all EU members while it is expected that both Hungary and Slovakia may veto the proposal due to their high dependency on Russian oil imports. The proposed Russian sanctions come at a time when many OPEC+ were already struggling to increase output inline with their quota hikes with targets well below the 400K targeted rise, with underproduction pinning crude prices above or near the $100 price mark for the near term.
Trade ranges CADUSD 1.2612-1.3142
GREAT BRITISH POUND
On Thursday, the Bank of England will announce its decision on monetary policy with a 25 basis point interest rate hike to 1.00% as expected in the markets. The interest rate hike, while expected all eyes and ears will be on the forward guidance as continued dovish signals from the Bank of England may likely weigh on GBP.
Trade ranges CADGBP 1.5738-1.6581
EURO
The EURO came under pressure as the European Central Bank still appear reluctant to commit to raising interest rates in July, as chief economist Philip Lane and Vice President Luis de Guindos left plenty of ambiguity in statements on the subject in their latest comments, giving little gains to the EURO on the dovish remarks, as the ECB rhetoric contrasts with the FED on their hawkish moves to support monetary policy tightening. German Retail sales fell 0.1% on the month and 2.7% on the year against the expectation of a gain of .3% as implications of the war on Ukraine affected consumer confidence.
Trade ranges 1.3241-1.3811
JAPANESE YEN
Japan’s economy has picked up as a trend, although some weakness has been seen in part, mainly due to the impact of COVID-19 and the rise in commodity prices but still stays quite dovish on their monetary policy and interest rates. The Bank of Japan is in no rush to raise interest rates in contradiction to other major central banks. In last weeks report, the Bank of Japan stated that it will continue to set short-term interest rates at minus 0.1 percent, while guiding 10-year Japanese government bond yields to around zero percent to support the economy, The Japanese economy will likely expand 2.9 percent in fiscal 2022, downgraded from 3.8 percent growth in the previous projection in January while target inflation of 2% may not be reached until 2023, putting more pressure on the Japanese currency.
The widening policy gap between Japan and the United States has precipitated the yen’s plunge in recent weeks. While the BOJ sticks to its ultralow rate monetary policy, the US treasury yield is nearing its 3% mark, its highest in many years.
Trade ranges 98.64-103.65
Major high risk data reports this week to note
|
Monday May 2 |
USD ISM Manufacturing PMI |
|
Tuesday May 3 |
AUD Cash Rate |
|
|
USD JOLTS Job Openings |
|
|
NZD Unemployment Rate |
|
Wednesday May 4 |
USD ADP Non-Farm Employment Change |
|
|
USD FOMC Statement and Federal Funds Rate |
|
Thursday May 5 |
GBP BOE Monetary Policy Report |
|
Friday May 6 |
CAD Employment Change and unemployment rate |
|
|
USD Non-Farm Employment Change |
|
|
USD Unemployment Rate |