May 2022: FX Outlook
Economic Outlook and Summary
April ended with the US dollar on solid footing. The greenback climbed steadily during the month, underpinned by a rash of Fed policymakers discussing the need for higher interest rates to fend off rising inflation, which jumped to 8.5% y/y in March. The greenback received an additional boost when St Louis Fed President James Bullard said the Fed needs to raise rates by 0.75% to reach 3.5% by year-end.
The ongoing Russian invasion of Ukraine weighed on risk sentiment, which intensified throughout the month when EU officials openly discussed banning all Russian energy.
The European Central Bank (ECB) policy meeting ended without a rate hike and vague message around the termination of QE. EURUSD suffered as a result.
The US dollar had a good month, but the same couldn’t be said for Wall Street. Rate hike chatter boosted the US 10-year Treasury yield to 2.95% and sent stocks tumbling. In April, the S&P 500 lost 8.59%, while the Dow Jones Industrial Average (DJIA) lost 5.05%.
The Bank of England hiked rates by 0.25%, and GBPUSD got thrashed.
Policymakers warned of recession risk and inflation rising to 10%.
The Peoples Bank of China (PBoC) and the Reserve Bank of New Zealand policy meetings May 19, and May 24 should also see rate increases announced.
The USD and Federal Reserve
The Fed meeting occurred May 4. The Fed raised rates 0.50%, rather than the 0.75% that many participants expected, thanks to Bullard’s comments which created market turmoil. Stocks soared, the US dollar tanked, and commodity prices rallied. The next day the moves were reversed as traders realized that steadily rising interest rates in the face of higher inflation were not good reasons to buy “risk assets.”
The US 10-year Treasury yield had a delayed reaction to the latest Fed rate hike and interest rate outlook. The yield soared to 3.09% after dropping to 2.91% immediately following the Fed announcement.
There will be a slew of Fed policymakers providing comment and insight in the next few weeks which may limit stock market gains and underpin the greenback. The key numbers to watch are US CPI on May 11 (forecast 8.4% y/y) and GDP on May 26, which is expected to rebound from the -1.4% y/y reported in April.
The Canadian Dollar and Bank of Canada
The Bank of Canada (BoC) is hawkish. The BoC gave the Canadian dollar a short-lived boost when it announced a 0.50% rate hike on April 13. Governor Tiff Macklem claimed the hike was the first of many increases because the “BoC” is serious” about fighting inflation. The Canadian dollar slid the next day, and drifted lower into month end with the focus on the US rate outlook.
Domestic influences will only have limited impact on the Canadian dollar as traders focus on broad US dollar sentiment, with the S&P 500 index and providing direction.
The Canadian dollar gets some support from oil prices that have been trending higher since the last week of April. News the EU is planning a full embargo on Russian energy is underpinning prices but concerns about slowing global growth limits gains. Opec is widely expected to bump its production by 400,000 barrel/day in June which may temper topside moves.
|Bank of Montreal
Forecast Table is for mid-market rates, and subject to change anytime.