The first full trading week of April started quietly with many markets closed for Easter Monday. It wasn’t until the start of the New York trading session that the U.S. dollar started to move. Despite Friday’s strong jobs report, yesterday’s better than expected non-manufacturing ISM and an increase in yields, the greenback traded lower against all of the major currencies. This was in many ways an extension from Friday where we saw a lackluster reaction to very healthy labor market numbers.
There are a number of reasons why the dollar kicked off the week with losses from profit taking, a broad based risk rally to concerns about inflation. However if the inflation concerns were real, stocks would be trading much lower. So for all of these reasons, we believe that the pullback in the U.S. dollar will be short-lived. March was a great month for the greenback and profit taking after such a strong move is not unusual. The Federal Reserve has indicated that the first rate hike will be in 2023 but interest rate futures are pricing in tightening in 2022. This week’s Federal Reserve minutes could go a long way in reinforcing or diminishing that view. It is the only major U.S. economic report outside yesterday’s ISM number that is market moving. The last time the Fed met, they confirmed that rates will be on hold until 2023 but a few days later, they said the supplementary leverage ratio for banks that allowed for more flexibility during the pandemic would expire at the end of March. The market believes that the Fed is less dovish and they will be looking to the minutes to confirm that.
Today’s Reserve Bank of Australia’s monetary policy meeting is one of the most important event risks this week and the Australian dollar was trading very strongly ahead of the meeting. It was the best performing currency on Monday. They were widely expected to leave policy unchanged, which is what happened. Job growth was very strong last month, building permits surged, manufacturing activity is accelerating and stocks just ended their best month in four. The RBA has many reasons to be optimistic but their tone is likely to remain cautious with slow vaccine rollout in Australia and Europe. According to the minutes from the March meeting, there will be no rate hikes until wage growth reaches 3%, something that is not expected to happen until 2024. Optimism from the RBA could send AUD/USD above 77 cents.
Later in the week, the Bank of Canada meets and like the Australian dollar, the loonie is trading strongly ahead of the rate decision. There’s talk that the central bank could taper asset purchases but we are not looking for any changes from the BoC. Job growth was very strong in February and with the U.S. charging forward with vaccine rollout, confidence in Canada is improving. However, in Canada itself, vaccine rollout is slow and just this weekend, the two most populous regions, Ontario and Quebec, tightened restrictions as more transmissible variants fuel rise in cases.
Euro and sterling also traded sharply higher but with U.K. and German markets closed yesterday, the move was driven entirely by U.S. dollar weakness and recoveries in oversold currencies. The outlook for the U.K. is far brighter than the Eurozone. Restrictions in the U.K. are easing as the opposite happens in the Eurozone. There are growing calls for nationwide approach to COVID restrictions in Germany. All of this means that GBP will continue to outperform EUR and at some point, sellers will return to EUR/USD as well.