USD: Still feeling the long squeeze
European stocks are higher and US equity futures are pointing to a positive start to the week, as global risk sentiment continues to drive the majority of FX moves amid strong volatility. This morning, the Australian and New Zealand dollars are leading the rally against the dollar on the back of risk-on sentiment and yet another strong day for the Chinese yuan. Reports that President Biden is considering lifting some of the tariffs on China are also helping. We doubt the Australian election had much of an impact – as discussed in the AUD section below.
At the moment, it still appears the market is in the process of rebalancing a positioning picture that was heavily skewed towards a long dollar. Given the large and widespread unwinding of dollar longs in the past 10 days, we suspect such a position-squaring effect may start to run out of steam soon, and markets will be left once again with the prospect of aggressive monetary tightening by the Fed (three back-to-back 50bp hikes are on their way, in our view) and a widening growth differential between the US and other parts of the world – in particular, Europe.
The positive outlook for the US economy, despite recession fears, should be confirmed by the flow of US data this week, with the focus mostly on the April personal income and spending report, which will also include the Fed’s favoured measure of inflation – the core personal consumer expenditure deflator. This should show decent real spending growth with households prepared to run down some of the savings accumulated through the pandemic, and inflation topping out, which could help to ease growing recession concerns.
The FOMC minutes from the May meeting should see a confirmation that 50bp rate increases in June and July are backed by the vast majority of members. We’ll also hear comments from Fed Chair Jay Powell later this week. Today, the data and Fedspeak calendar are quite quiet.
All in all, we think that the USD long-squeeze may add some extra pressure to the greenback in the coming days, but we see a higher probability this week that the dollar will find some stability or show signs of rebounding given the still supportive monetary and growth outlook for the US. The 101.00-101.50 area could represent the bottom of the dollar correction.