US dollar sell off continues as risk appetite returns
Stock markets and risk assets in general rebounded strongly last week, while US rates did not.
The result was a predictable dollar sell-off, with the main beneficiaries the European and Latin American currencies. The former was boosted by the closing rate differentials across the Atlantic, the latter by the return of risk appetite in general and the blistering commodity rally in particular. Special mention to the Polish zloty, which topped the week with a stellar performance in realisation that the Polish economy has been resilient to the war’s impact so far, while the country edged closer to unlocking funds from the EU’s pandemic recovery package. Macroeconomic data out of the main currency areas will be front and centre this week. The Eurozone flash inflation report for May is out on Tuesday, and the key payrolls report out of the US will cap the week on Friday. As for the former, markets expect yet another increase in both the headline and core index, which should seal the deal for an ECB rate hike no later than July. As more and faster ECB hikes are incorporated into expectations, the euro should receive a significant boost, and its recent rebound may have further to run.
The Czech koruna sold off slightly last week despite largely favourable external conditions in what could be a sign that the limit to koruna’s strength may not be too far from current levels. CNB meeting is still a few weeks away, but signals from the MPC suggest we’ll see a similar-scale hike to the previous one. On Sunday one of the hawks within the MPC, Tomas Holub said he’ll likely support a hike in June and called a 75 basis point hike implied by the market pricing a ‘realistic prediction’. This week will bring first-quarter GDP growth data revision (Tuesday) and manufacturing PMI print (Wednesday). Aside from that, any noises from the CNB will be worth keeping an eye on.
Last week’s Euro Area PMIs for May held up much better than either the UK or the US, in a sign that the economy there is more resilient than it’s given credit for. The clearly expansionary numbers dispelled the notion that a recession is near, and what we are left with is monetary policy settings completely out of line with the inflationary and economic backdrop. Inflation data this week will likely show yet another all-time record level. The number will be key to decide the actual size of the incoming July rate hike, which ECB President Lagarde all but confirmed during her communications last week. A nasty upside surprise in inflation would probably increase the odds of a 50 basis point hike and be supportive of the common currency.