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Market Briefing: Dollar Avoids 'Rapid Unscheduled Disassembly' For Another Week

CalendarApril 21, 2023

The trade-weighted dollar looks set to notch its first gain in six weeks - defying forecasts for a Starship-like return to Earth - on a widening in rate differentials against the pound and euro. Volatility benchmarks - on equities, Treasuries, and currencies - are all softer, with risk appetite improving across most asset classes even as the global manufacturing sector exhibits signs of cooling. Commodities are struggling for direction, with supply constraints warring with slumping demand forecasts for precedence in driving prices.

Canadian retail sales slid a better-than-expected -0.2 percent in February, with the core measure - which excludes gas stations and car dealers - rising 0.1 percent. But an unofficial advance estimate showed a -1.4 percent decline in sales was likely in April, suggesting that overall consumer demand is beginning to weaken in the face of rising prices and growing economic uncertainty. The loonie climbed incrementally after the release, but remains roughly a percentage point weaker on the week.

The British pound is slightly weaker after Deputy Prime Minister Dominic Raab resigned in response to the results of an independent investigation into bullying allegations, which determined he was at fault in several incidents. As one of Rishi Sunak’s closest allies, Raab’s departure could raise the risk of more internecine squabbling among Tories - but after last year’s near-death experience we don’t see any challengers to the current party leadership emerging in the immediate future.

Separately, retail sales dropped more than expected in March, suggesting that wet weather (more than the UK’s usual) and broader economic concerns weighed on consumer consumption. Headline receipts at online and bricks-and-mortar stores fell by 0.9 percent month over month, with ex. fuel volumes down 1.0 percent. Consensus forecasts were set closer to 0.5 percent.

Odds on at least two more rate increases from the European Central Bank are firming after S&P Global’s euro area composite purchasing manager index improved more than expected in April. According to an update published this morning, the headline index jumped to 54.4 in April, up from the prior month’s 53.7 reading, and firmly in expansionary territory.

Today’s US calendar looks light. S&P is expected to report renewed declines in economic sentiment, with its manufacturing purchasing manager index seen dropping to 49.0 in early April from 49.2 in March, while services decline from 52.6 to 52.0. Federal Reserve Board Governor Lisa Cook will discuss “important questions for economic research” at an event later in the day, but currency markets don’t typically concern themselves with the big questions, so we don’t expect her comments to trigger much price action.

The tempo of activity should accelerate next week. Growth figures from Canada, the euro area, and the United States should highlight surprising resilience in the first quarter, with higher interest rates and elevated energy prices failing to derail a still-strong post-Covid rebound. The closely-watched US Employment Cost Index should show an acceleration in wage pressures during the first quarter, while the core personal consumption expenditures index should remain stubbornly high for March, supporting the case for additional monetary tightening. Traders are now assigning 82 percent odds to a final quarter-point rate increase at the Fed’s May 2-3 meeting, with cuts expected to come as soon as September.




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Karl Schamotta

Karl Schamotta

Chief Market Strategist

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