Morning Commentary: The Domino Effect

Foreign Exchange - Morning Commentary

The Domino Effect

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
As we arrive this morning, the U.S. dollar (DXY index) is up for the third day in a row and is reaching its best levels since June 2017 as the DXY has broken through key technical levels. The U.S. economic expansion continues to march on and U.S. economic data continues to outperform many of its G7 and G10 peer group. An important contribution to the DXY gains during Q1 has been the domino effect from many G7 and G10 central banks as they pivot away from their previous rate hike guidance or reverse course and lay the groundwork for potential rate cuts.
We did not fully anticipate this change to the U.S. dollar status as our own Federal Reserve pivoted away from its previous course of planned rate hikes in January to a more neutral stance. U.S. interest rates had been falling in Q4 in anticipation of the Fed pivoting away from its more hawkish stance as global equities cratered in Q4.  But the Fed's pivot and U.S. dollar losses were short-lived, and the U.S. dollar soon began to recover.
The Fed’s pivot provided the necessary cover for other central banks to also move away from any tightening bias to either a more neutral stance or a dovish bias. Today, there is barely any central bank left that is willing to commit to any meaningful rate hiking program with some like the Reserve Bank of New Zealand moving to an easing bias and the Reserve Bank of Australia adopting a further easing bias. Yesterday, the Bank of Canada abandoned any hiking bias.
Today’s price action regarding the stronger DXY was spurred on by the Swedish central bank (Riksbank) as they delivered a dovish hold on interest rates. They kept interest rates unchanged as expected at -0.25% but pushed the possibility of the next rate hike to the end of 2019 or early 2020. This surprised the market and has caused the Swedish krona to be the weakest major currency today. In the short term, continue to expect the U.S. dollar to remain firm overall.
  • Korea saw a big miss in Q1 GDP. Growth was expected at 2.5% YoY but instead came in at 1.8% following a gain of 3.1% in Q4. The 1.8% growth rate is the lowest since Q3 2009. Q2 is starting off weak with exports for the first 20 days of April contracting by 8.7%.
  • U.S. jobless claims rose sharply by 37,000 to 230,000. Market expectations were for a print near 200,000. This snapped a five-week streak of declines which is the longest since 2016. U.S. interest rates are nearly unchanged on the session.
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