Dollar set to close month on a strong note, braces for Fed meeting
Euro and yen lick their wounds, gold stages a comeback
Stock markets roar back but Amazon disappointment spoils the party
Dollar unscathed by GDP miss
The world’s reserve currency took a small step back on Friday, pausing for breath after it obliterated everything in its path this month, having gained 7% against the Japanese yen and 4.5% against the euro. Expectations that the Fed is about to put the brakes on an overheating US economy, concerns that a deepening energy crisis will torment Europe, rolling shutdowns in China dampening growth, and the Bank of Japan sacrificing the yen all played a role.
Even a surprise contraction in US GDP for Q1 couldn’t derail the dollar’s hype train, with investors taking solace in the fact that the disappointment reflected inventory unwinding and a widening trade deficit, instead of the consumer pulling back. Hence, this is unlikely to deter the Fed from raising rates by 50 basis points next week and getting the balance sheet reduction process rolling.
However, there is some apprehension that Chairman Powell might tone down the hawkish rhetoric during his press conference following the negative GDP print. With the dollar having come so far so fast and the Fed being so aggressively priced, a modest pullback on profit-taking ahead of the meeting is natural. That said, it is difficult to argue against the overall uptrend, until growth in the rest of the world picks up.
Euro and yen lick their wounds
The overwhelming pressure on the euro and Japanese yen seems to have abated for now, with both currencies licking their wounds on the final trading day of the month. News flow has not really improved, so this seems like a relief rally after both currencies were beaten to a pulp.
The Bank of Japan signalled it will resist the temptation to normalize policy, essentially offering the yen as a sacrificial lamb in its multi-decade struggle to generate some inflation. FX intervention remains unlikely because the probability of success is low, and outside of some good news on the war that cools commodity prices and tightening bets for foreign central banks, there isn’t much that can rescue the devastated yen.
In the euro area, markets have grown more confident that the ECB will raise rates in July, but that hasn’t been enough to stop the single currency’s slide. Money markets are now pricing in a 95% implied probability for a July rate hike, which means the ECB needs to scrap its asset purchase program in June, violating its own forward guidance. Otherwise the euro could tank even further, pouring gasoline on the inflationary flames.
Gold bounces, Amazon dives
With the dollar stopping to catch its breath, gold has been given the green light to attempt a rebound, recovering most of its losses for the week. The technical picture has sustained damage with the precious metal posting a lower low, although there are also some signs of relative strength - bullion’s injuries have been minimal considering the stunning moves in the dollar and real yields this month.
In the equity arena, dip buyers returned with a vengeance yesterday to push the S&P 500 higher by 2.5%. Traders point to special elements like month-end flows and short covering as the catalysts behind this bounce, rather than any real changes in the fundamental outlook. However, the relief rally ran out of juice once the market closed and Amazon and Apple released their earnings.
Amazon shares cratered in after-hours trading after the company reported its first loss since 2015, and even though Apple beat every metric and ramped up its buyback program, its stock still fell after it warned of supply issues dampening future sales.
These reactions perfectly encapsulate the ‘asymmetric’ nature of this entire earnings season. Companies that report solid results struggle to rally in the aftermath, while any disappointment is met with an iron fist.