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USD rally on pause... for now
USD consolidates gains, EM currencies bounce back
After rallying aggressively since the beginning of the week, the greenback retreated against most of its peers as investors took a breather to assess the dollar’s outlook. The dollar index rallied as much as 1.16% since Monday morning and hit 99.68, thanks to a sharp debasement in the CHF (-1.80%), the JPY (-1.10%) and the EUR (-0.95%). Emerging markets were also badly hit with the TRY, PLN and ZAR falling 1.80%, 1.25% and 1.05% respectively. Despite this temporary setback for the greenback, we remain dollar positive as we believe the market is not done pricing in the upcoming rate hike by the Fed (implied probability for an upside move, extracted from the Fed funds futures, stands at 95.3%).
Emerging market currencies are on the front line, especially after the rise of downward pressure in commodity prices, which was mostly triggered by worries over China’s economic outlook. This morning, Asian EM have had a hard time keeping their heads above water, with the exception of the South Korean won that rose 0.30%.
Across the Pacific, USD/BRL continued to trade within its uptrend channel and is currently testing its 200dma that stands at around 3.2147. The publication of April’s inflation data will most likely leave investors unmoved. Headline inflation is expected to come in at 4.10% y/y, down from 4.57% in March, which would make it the lowest read since July… 2007, when it stood at 3.74%.
The BCB has been cutting the Selic aggressively since October last year and has even speeded up the process recently by cutting it 1% down to 11.25% in April. This is rather good news for the Brazilian economy as it gives a breath of fresh air on the credit side. Unfortunately, this move will make the Brazilian real less attractive for carry traders, which explains why the real has begun to reverse gains starting mid-March. USD/BRL closed Tuesday’s session at 3.1894 and is expected to open slightly lower this afternoon as the USD consolidates gains.
Gold is still suffering as risks fade
Since mid-April, gold has continued to decline and it is now around its lowest level since March. This comes as the French election fears have now faded and also recession risks have seemed to be lower for some time.
There are a few things to be said anyway though. First data from the first quarter of the US economy has clearly been mixed in terms of growth and car sales. Recent data was better, such as non-farm payrolls which printed above 200k for April and the unemployment rate fell to 4.4%. As a result, we believe markets are buying back the Fed storytelling about the rate path. President Trump is less and less at the centre stage of the markets and the Fed is clearly back in.
In Europe, the French elections provided uncertainties but it seems that as Emmanuel Macron’s victory was even larger than expected, this removed it all. Fading European political uncertainties are also sending gold lower.
Technically-wise, the yellow metal should likely monitor the $1200 level. In case of a bearish breakout, we could see gold back towards levels of around $1150.