The dollar enjoys another day in paradise

Markets

The dollar appreciated another day in paradise yesterday. The greenback excelled at the start of the new week, sprinting higher against all of its most important peers during genuine risk aversion. Recession fears have already rebounded after Friday’s strong payrolls provided some temporary comfort. The trade-weighted index (DXY) hit a new two-decade high at 108.02. This move coincided with USD/JPY breaking previous cycle highs to close at 137.44 (24 year high). Euro’s unwavering weakness added to the prolonged EUR/USD decline. The combination closed a few millimeters from parity (1.004). EUR/CHF erased a two-day rally to end at 0.987. The British pound also kept the upper hand over the common currency. Since breaking below the rising trend channel, EUR/GBP has fallen around 1.5 big digits from 0.86 last Tuesday to 0.844 yesterday. Cable (GBP/USD), however, remained at year-to-date lows around 1.19. Meanwhile, several senior Tories have warned of political paralysis if outgoing Prime Minister Johnson stays on until his successor was chosen. This is due by September 5. Former Chancellor Sunak has entered and is currently leading the first race. Movements in other markets were also marred by the reduction in risk. Core bonds surged, with German Bunds outperforming USTs in sessions that see liquidity increasingly dry up. German rates fell between 7.2 (30 years) and 10.1 (5 years) basis points. Peripheral spreads against the German 10-year increased by 2 bps. US yields fell from 3.4 (2 years) to 9.4 (20 years) basis points for the day. Shares fell 1-1.5% in Europe and 0.5-2.3% in the United States. Technology has underperformed.

The negative mood has spread to Asian trades this morning. South Korean stocks are lagging (-2.2%). European equity futures suggest an open in the red at -0.75%. The US yield curve flattens by 3.5 bps ahead and remains dollar dominance in the foreign exchange markets. The EUR/USD approached parity at 6 pips. Given the lack of economic data, we expect the current market atmosphere to set the tone for trading today. A test of the highly symbolic EUR/USD 1 level seems inevitable. A break opens the way to intermediate support around 0.96. But the real benchmark is the all-time low of 0.823. The market avoids the euro while hoarding dollars for the rainy days ahead. He still poses another difficult compromise for the European Central Bank because it further accentuates imported inflation. That said, markets are much less convinced than just a few months ago of the number of rate hikes the ECB will be able to deliver with the continent in (energetic) crisis mode. This is less the case for the Fed, with the US economy still showing resilience (eg Friday’s payrolls). We can’t wait to see if Inflation figures in the United States in June due tomorrow are able to diverge markets focus again. In Europe, an €8 billion double-tranche transaction is scheduled today, including a new 7-year benchmark due December 4, 20029 and a tap of the 0.45% EU bond 07/2041.

News headlines

According to data from the British Retail Consortium (BRC), the face value of retail spending in the UK for the third consecutive month printed below the level of the same month last year -1.0% y/y (vs. -1.1% in May). However, as the data is not corrected for price increases, sales volumes are down sharply. According to BRC sales volumes are declining at a rate not seen since the depth of the pandemic, as inflation continues to bite and also cut spending”. BRC also reports that buyers are shift spending to less expensive food brands and other products and postpone some purchases.

According to the New York Fed’s June 2022 survey of consumer expectations, US consumers see inflation rising further over the next year, from 6.6% to 6.8%. However, medium-term (3-year) inflation expectations eased to 3.6% from 3.9%. American consumers too expect a sharp slowdown in the rise in house prices in one year to 4.4% against 5.8%. The drop is the second largest on record and the expected rise is the smallest since February 2021. US households see higher unemployment and an increasing likelihood of losing their own jobs in the coming year (11.9% vs. 11.1%). Median expectations for household spending growth for the year ahead have retreated from their peak in the series in May, falling 0.6 percentage points to 8.4%, but remain well above their average of 5.0% for 2021.

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