Forex Trading Reminder: Worries about global economic slowdown increase, triggering dollar retreat, awaiting retail sales data

In early Asian trading on Tuesday (May 17), the U.S. dollar index extended its decline. The U.S. dollar index fell on Monday after hitting a 20-year high last week, as market concerns increased over the prospect of a global economic slowdown.



Monday's trade was focused on macroeconomic data, said Bipan Rai, head of North American foreign exchange strategy at Canadian Imperial Bank of Commerce Capital Markets. It's important to stress that the risk to a stronger dollar is greater, mainly because, if you look at the macroeconomic environment, the fundamentals don't look good. From a safe-haven perspective, this should still provide support for the greenback against most currencies.

But he said the dollar was consolidating after its recent strength and could be stuck in a range for a few sessions, and "it would be reasonable to have a period of consolidation before the next rally."

Mazen Issa, senior currency strategist at TD Securities, said the dollar could be trading in a muted way, partly because a lot of bad news has already been priced in, but also because investors are awaiting U.S. retail sales data on Tuesday and comments from Federal Reserve Chairman Jerome Powell.

Still, Issa said he doesn't "think we're in a market that's going to see a weaker dollar, and it's going to take a lot of work to get investors out of the dollar."

The euro recovered from earlier lows after ECB Governing Council member and Bank of France President Villeroy de Gallo said the euro's weakness could threaten the ECB's efforts to steer inflation closer to its target. HSBC strategists expect the euro to fall to parity with the dollar over the next year. "Much weaker growth and much higher inflation present the ECB with one of the toughest policy challenges among the G10 countries (central banks)," they said.

Preview Tuesday

GMT+8 Tuesday 22:00, 2022 FOMC voter, St. Louis Fed President Bullard speaks on the economic outlook; 21:15, 2023 FOMC voter, Philadelphia Fed President Harker speaks on the topic of health care as an economic driver speech.

Wednesday 00:30, 2023 FOMC vote committee, Minneapolis Fed President Kashkari speech; 2:00, Fed Chairman Powell interviewed by The Wall Street Journal; 2:30, 2022 FOMC vote committee, Cleveland Fed Chairman Mester made an opening speech at an expert panel meeting on inflation; at 6:45, the 2023 FOMC vote committee and Chicago Fed President Evans delivered a speech on the economic outlook.

Institutional view

Citi: Short-term short USD/JPY attractive

Citi's Vasileios Gkionakis said, "We think short-term dollar-yen shorting is attractive. We expect the most likely scenario is that risk assets will continue to fall, but yields will also fall in the near term as growth concerns linger; in our view, this combination suggests downside for USD/JPY, especially This is while USD positions remain skewed long; in general, we think the market remains significantly long USD, especially USDJPY. As the U.S. dollar is widely held, its effectiveness in protecting a portfolio also decreases.

JPMorgan: Markets overestimate recession risk

JPMorgan strategist Marko Kolanovic said he expects U.S. and European stock markets to be pricing in a 70 percent chance of a near-term recession. This compares to a 50% probability of pricing in the investment-grade bond market, a 30% probability of pricing in the high-yield bond market, and a 20% maximum probability of pricing in the interest rate market. Either the stock market proves right, a recession happens, and bond yields plummet, or the interest rate market proves right, the economy escapes a recession, and the stock market recovers. Our view remains that the probability of a recession in the next 6-12 months is low, so maintain a pro-risk stance.

Westpac: The RBNZ will raise rates by 50bps at each of the next three meetings

Westpac's acting chief economist in New Zealand, Michael Gordon, said the Reserve Bank of New Zealand will raise the official cash rate to 2% at its May 25 meeting, before adding two more 50% interest rates in July and August. basis point. After that, two more rate hikes of 25 basis points each will take rates to a peak of 3.5% later this year (previously forecasted to peak at 3%). Gordon said: 'We acknowledge that four consecutive (50 basis points) are almost unprecedented in the era of inflation targeting, but the situation the RBNZ is facing today is also largely unprecedented and we think the RBNZ's focus for the next few months will be on make up for the past.

Goldman Sachs: The dollar has been greatly overvalued, and a strong dollar may not be sustainable when a recession really hits

While the U.S. dollar typically strengthens when a recession looms, once it enters a recession, betting on a stronger U.S. dollar doesn't work. Historical data shows that the U.S. dollar is more mixed during economic contractions. Investors have turned to the U.S. dollar for safety this year, which Goldman Sachs believes is currently “substantially overvalued” by about 18%. There are two possibilities for the dollar's trajectory in the coming weeks: if the global growth outlook improves, the greenback will weaken as investors move to riskier assets; In the former case, the U.S. dollar should be shorted against most currencies, and the bank is especially bullish on commodity exporters like the Canadian dollar. In the latter case, the yen may outperform the dollar, as the yen often performs well during recessions.

Wells Fargo: Current conditions could easily spawn sovereign debt crises in emerging markets

Wells Fargo strategist Brendan McKenna wrote in a note Monday that the current situation could easily create a sovereign debt crisis in emerging markets. Our concerns stem from tightening monetary policy by the Federal Reserve, subdued global growth prospects, a military conflict involving Russia, heightened geopolitical and political risks, and more, all of which are the worst of worst-case scenarios. Some countries with weak fundamentals and political instability are likely to experience currency crises in the future. Multiple currencies are likely to hit all-time lows against the U.S. dollar over the next 18 months.


Renowned Economist: Beware of Simultaneous Economic, Energy, Food and Debt Crises

As a major shock, it is easy to understand that the Russian-Ukrainian conflict has attracted much attention. However, some "small problems" that have not been taken seriously are constantly stacked, and the risks brought by them cannot be ignored. The conflict between Russia and Ukraine has not only caused untold loss of life and property, turned millions of people into refugees, but also created a stagflation hurricane that swept the global economy. For most countries, neither rising food and energy prices nor new supply chain disruptions can be avoided through domestic policy adjustments.

For most countries, the immediate economic consequences of the Russian-Ukrainian conflict could be rising inflation, slower growth, and rising inequality, noted economist Mohamed El-Erian, chief economic adviser at Allianz, wrote in a recent article. and unstable financial conditions. For developing countries that rely on commodity imports, the challenges are even more severe.

Therefore, Mohamed El-Erian also pointed out that it is in the interests of advanced economies to rescue poorer countries from disaster. In this regard, there are examples in the West, especially in the 1970s and 1980s. The effectiveness of today's actions depends on policymakers developing sound, proven solutions and their continued implementation with strong leadership, coordination, and perseverance.