Daily Market Comment – Dollar steamrolls FX rivals, earnings blitz begins

  • US dollar goes on a rampage, hits new highs against euro and sterling
  • China tries to slow yuan depreciation, Hong Kong dollar peg in trouble
  • Gold gets knocked down, Microsoft and Google report earnings

Dollar shines bright

The US dollar continues to bulldoze its way through the FX complex, crushing everything in its path. With the Eurozone economy under pressure from soaring living costs, the broadening shutdowns in China dampening growth, and the Bank of Japan’s refusal to play the normalization game, there has been a perfect storm that favors the US dollar.

In contrast, the US economy is in good shape. The labor market is rock solid and the energy shock won’t hit consumers quite as hard as in Europe, allowing the Fed to raise interest rates with urgency to rein in inflationary forces. The question is whether the Fed can engineer a ‘soft landing’ or whether it will overplay its hand and cause a recession. 

Euro/dollar got demolished yesterday, unable to benefit from Macron’s victory in the French election. Pessimism around the Eurozone’s economic fortunes, growing bets for rapid-fire Fed rate increases, and the turbulence in equity markets are pushing the pair towards its pandemic lows around 1.0635. This is where the real battle might play out. 

Broader FX outlook and China

It has been a similar story across the FX market. Sterling has caved under the weight of the mighty greenback as well, thanks to its correlation with risk sentiment and signs that the British economy is losing steam. The yen did manage to stabilize lately, albeit at very weak levels. The threats of FX intervention by Japanese authorities seem to have done the trick, for now.

Over in China, the central bank pledged to juice up the slowing economy with more cheap credit and attempted to slow down the yuan’s rapid depreciation by loosening the FX reserve requirements for local banks. This helped breathe some life back into Chinese markets and stabilize the yuan, but admittedly, the stimulus measures are just too mild to nullify the damage from the expanding lockdowns. 

The Hong Kong dollar is in trouble too, testing the weaker side of its peg with the US dollar. With the Fed raising rates while the local economy suffers, Hong Kong authorities face a dilemma - should they burn through their FX reserves to defend the peg or abandon it altogether? Defending it only works for a while as the peg would become costlier to maintain the more the US dollar appreciates. 

Another solution is to follow the Fed and raise rates, but that is almost out of the question when the economy is so fragile. 

Gold cools, stocks brace for earnings

Gold prices rediscovered gravity this past week, falling without a parachute to hit the $1900/ounce region as the negative forces of rising real yields and the strengthening US dollar finally overpowered safe haven demand for the yellow metal. 

In the stock market, Wall Street closed a turbulent session higher on Monday, with sentiment getting a boost from news that Twitter’s board of directors accepted the offer from Elon Musk to buy the company. With dark clouds gathering over the global economy while central banks and governments roll back their support, equity markets have been in a sour mood overall. Yet indices like the S&P 500 have held up because of the resilience in heavyweight tech names. 

Most of the tech complex will report earnings this week, starting with Google-parent Alphabet and Microsoft today. Make no mistake, this is crunch time for the stock market. If the tech generals show any cracks in their armor, then the indices could roll over to retest the March lows.  

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