Monthly FX Update | May 2023
Economic Outlook and Summary
April had a lot of drama.
Fed officials followed up the March rate hike with a mixed message. Some warned of the need for further rate hikes like Philadelphia Reserve Bank President Patrick Harker who said inflation was still too high and he anticipated some additional tightening. Governor Lisa Cook said if tighter financing conditions are a significant headwind on the economy, the appropriate path for interest rates is lower. Both people are FOMC voting members.
The Reserve Bank of New Zealand injected another note of uncertainty into the Fed rate hike or pause debate. They surprised markets and hiked rates 50 bps on April 5 because inflation was” still too high.” That action suggested the Fed would remain hawkish because of high US inflation.
The RBNZ concerns were quickly forgotten when the US March inflation report provided fodder for both the rate hike and rate pause camps.
First Republic Bank reignited banking crisis fears on April 24 after reporting it had lost more than $100 million in deposits since the beginning of the year. Its share price tanked. The Bank ceased to be an entity on May 1, after it was seized by regulators and sold to JPMorgan Chase.
In April, economic data took a back seat to quarterly earnings reports and FX and bonds reacted to surprises and misses. Microsoft (MSFT: Nasdaq) and Alphabet (GOOGL: Nasdaq) earnings surprised to the upside which improved risk sentiment while Tesla (TSLA: Nasdaq) disappointed. Traders were also cautious awaiting the FOMC meeting on May 3.
The USD and Federal Reserve
The US dollar ended April mixed. It lost 2.3% against the Swiss franc and 0.96% against the Euro. However, it gained 2.14% against the New Zealand dollar and 2.04% against the Japanese yen.
May is shaping up to be a similar trading environment as in April, because of the FOMC’s dovish policy. The Fed raised rates by 25 bps, then tweaked the statement enough that the market concluded it was the last rate hike of this cycle.
Fed Chair Jerome Powell explicitly stated in his press conference that the Fed was not announcing a pause.
Traders didn’t believe him. The US 10-year Treasury yield tumbled to 3.32% on May 4 and the US dollar retreated.
The market prices 75-100 bps in rate cuts by year end.
The Canadian Dollar and Bank of Canada
The Bank of Canada left interest rates on hold April 12 and after initial reactions around the monetary policy news and the latest inflation data, the Canadian dollar settled into a USDCAD 1.3305-1.3360 range.
The Canadian dollar has some upside in May, especially if there is further evidence that US inflation has peaked.
If so, the US dollar will see renewed selling pressure against the majors while narrowing US/CAD interest rate differentials provide support to the Canadian dollar. Those spreads may narrow further if Governor Macklem is to be believed and the BoC keeps rates on hold for the rest of the year, especially with traders pricing in US rate cuts.
West Texas Intermediate traded erratically in April. Prices climbed to $83.35 by mid-month in the wake of the surprise Opec production before the rally stalled. Prices slid steadily for the rest of the month and then plunged to a low of $63.71/b on May 4, a 23.5% drop. The price pressures stemmed from fears of a US recession and global growth slowdown along with technical and stop-loss selling, which exacerbated the move.
|Bank of Montreal
Forecast Table is for mid-market rates, and subject to change anytime.