Daily Market Comment – Euro/dollar kisses parity, stocks slide as caution reigns



  • Euro tests parity against US dollar, similar moves across FX arena
  • Stocks and oil prices edge lower in the shadow of China lockdowns 
  • Gold cannot shine either despite cautious mood, extends selloff
Hello parity

A sense of nervousness has descended on global markets once again, with traders slashing their exposure to riskier assets and taking shelter in the only hedge that works - the mighty US dollar. The reserve currency has been riding a perfect storm thanks to its unique ability to provide attractive returns and protection, rallying both when investors fret about central banks raising rates at a faster clip and when recession concerns eclipse everything else. 

There is simply no alternative. A deepening energy crisis amid worries that Russia is about to cut off gas supplies to Europe has bulldozed the euro, by depriving it of its historic trade surplus and dampening the outlook for economic growth. Euro/dollar has been beaten to a pulp, down more than 4% already this month to test parity for the first time in two decades. 

With the ECB reluctant to accelerate its tightening plans and defend the single currency, there isn’t much left that can stop the bleeding. Some good news on the war or a meaningful cooldown in US inflation might do the trick, but aside from that the outlook for euro/dollar looks grim. A fierce battle is underway for the parity level and if the bears prove victorious, the next major cluster of support is not until the 0.97 region. 

Cautious mood

The safe haven rally in the dollar has snowballed into an avalanche of epic proportions, burying every other major currency, especially those that are sensitive to global risk sentiment. The Australian and New Zealand dollars both hit new two-year lows today, resuming their downtrends amid concerns that a global slowdown might have a disproportionate impact on economies that rely on commodity exports. 

Sterling has been caught in the crossfire too. Cable has sunk to levels not seen since the depths of the pandemic, partly because of the rampaging US dollar and partly due to the UK’s twin deficits, which leave the pound exposed to any shifts in global risk appetite. This also explains why Cable and the S&P 500 have moved in the same direction more than 90% of the time over the last three months. 

Speaking of the S&P 500, it lost around 1% yesterday and futures point to similar losses when the market opens again today. The cautious mood was on full display in every asset class, with bond yields and commodity prices tanking alongside equity markets as the return of partial lockdowns in major Chinese cities amplified concerns around a global slowdown. 

Investors might be equally nervous about tomorrow’s US inflation report, and what the major banks will signal about the health of consumers when the earnings season gets rolling this week. 

Gold carves out new lows

In the commodity arena, even gold could not escape unscathed. Bullion has been caught in a vice between a US dollar rally that's gone into overdrive and real Treasury yields that won’t stop grinding higher. 

It has been a case of ‘all news is bad news for gold’, with the precious metal suffering during both inflationary and recessionary bouts of concern, since inflation fears propel yields higher while recession risks turbocharge the dollar. It’s difficult to see this dynamic changing until the Fed hits the pause button on rate increases. 

There isn’t much on the agenda for today aside from a speech by Bank of England Governor Bailey at 17:00 GMT. 


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