Forex Comment Apr 28

Good day for risk, not so for USD demand

Expectations that central banks will shore up stimulus this week has buoyed markets and kept dollar purchases at bay; China may need to dig deep again as PMIs are likely to disappoint

by Uwe Parpart
Good day for risk, not so for USD demand

(ATF) Following the lead of US stocks on Monday, Asian and European equities rose Tuesday and US futures indicate that the risk rally has legs.

It looks like the Dow and S&P500 could gain and hold critical levels of 24,000 and 2,900, respectively. Reopening of major economies accompanied by ramped up testing are the key phrases. Few believe in a V-shaped recovery; but a U-shape rebound looks most likely and the L-shape is fading from the discussion. 

We will have earnings reports from some of the world's largest and best-run companies (among them Apple, Amazon, Microsoft, Samsung) and their forward guidance should provide more data points on recovery prospects.

We will also have Fed and European Central Bank meetings this week and while typical economic forecasts of neither are among the world's more reliable ones, they can at least be counted on to commit to printing more money as needed and not to upset risk sentiment – unless, of course, Madame Lagarde "misspeaks" again.

When risk assets flourish, US dollar demand takes a back seat and the USD retreats. We saw the familiar picture again today. DXY had declined by 0.45% to 99.5860 by 6:30pm HK time and will likely lose more ground as global trading progresses.

We expect the Chinese currency to rise as deflationary pressures mount. However, there is still no clear signal of that. The People’s Bank of China (PBoC) set parity at 7.0710 Tuesday morning, virtually unchanged from Monday. It stood at 7.0750 at 6:30pm, essentially unmoved.

But economic news from China points to serious PPI deflation danger and the PBoC has its work cut out for itself to counteract the trend.