Market Briefing - Dollar Underperforms in Calm Markets

As Ella Fitzgerald once put it: It’s summertime, and the money is easy. Commodity-linked currencies are jumping, and the equity futures are high. The dollar’s rich, and alternatives are good-looking.

Ten-year Treasury yields are up slightly to 3.23 percent, but remain well below the highs reached in the last two weeks, and the dollar is trading defensively as investors go hunting for undervalued assets in other jurisdictions. 

Asian indices and currencies are up sharply after China said it would halve its quarantine requirement for foreign travellers - a sign that policymakers are willing to risk higher infection rates as they work to minimize economic disruption. 

The Canadian dollar is climbing, riding a rise in front-month oil benchmarks to gain 50 basis points in overnight trading. Barrels of West Texas Intermediate are going for $111, while Brent is knocking on the $117 mark as political turmoil in Libya threatens to knock output offline. 

A Reuters report suggested the European Central Bank’s new anti-fragmentation mechanism might “sterilize” its bond purchases of peripheral debt by paying above-market interest rates to banks willing to park funds with it. The euro rose on this less-dilutive outlook, and then moved even higher when President Christine Lagarde said policymakers would work in a “deliberate and sustained manner” to bring down inflation. A break through resistance at the 1.0616 55-day moving average could see the currency rally into the 1.08’s against the dollar. 

US advance economic indicators for May will land at 8:30 am, with wholesale inventory numbers coming in for particular scrutiny. An easing in supply chain stresses has allowed many of America’s largest businesses to build larger-than-normal inventories, but “bullwhip” effects suggest that these stockpiles could have a disinflationary impact in months to come. 

Consumer confidence levels are likely to fall when the Conference Board publishes its latest index values at 10:00 am. With high inflation hitting pocketbooks and recession talk growing louder, consensus is for a print close to 100, but we think risks are tilted to the downside. 

Central bankers are assembling in Sintra, Portugal for an annual policy forum. Bailey, Lagarde, and Powell are all scheduled to speak tomorrow. Longer-term issues are likely to remain the primary focus, but the trio could mount a defence against recent political attacks, pointing to the role of outsized fiscal spending in driving inflation rates higher. Market implications should be relatively modest. 

Implied volatility levels are falling as the summer doldrums kick in and central banks adopt more predictable policy paths. Quarter-end position-squaring could bring mean reversion in a number of pairs over the next few days, with the dollar vulnerable to a fall against its major counterparts as traders prepare their books for the second half. 

Upcoming Events

TUESDAY

USD Advance Goods Trade Balance, May

USD    Conference Board Consumer Confidence, June

WEDNESDAY

USD Department of Energy Weekly Inventories

CNY    Purchasing Manager Indices, June

THURSDAY

EUR    Unemployment Rate, May

USD    Personal Consumption Expenditure, May

CAD    Gross Domestic Product, April

USD   Weekly Jobless Claims

CNY    Caixin China Manufacturing Purchasing Manager Index

USD    OPEC+ Meeting

FRIDAY

EUR Consumer Price Indices, June

USD    ISM Prices Paid

USD    Baker Hughes Weekly Rig Count