CAPITALDIGEST, MARKET REVIEW. 16 MAY 2022.

MONDAY 16/5/2022 – FOREX-DOLLAR SLIPS FROM 2-DECADE HIGHS; YUAN FALLS ON WEAK CHINA DATA The U.S. dollar index was lower on Monday after hitting a 20-year peak last week, with the global economy in focus after weak economic data from China highlighted worries about the prospects for a global slowdown. Creating a risk-off mood on Monday, China’s retail and factory activity fell sharply in April as extensive COVID-19 lockdowns confined workers and consumers to their homes. But Shanghai did set out plans for the return to more normal life from June 1. Following the release of China’s data, Bipan Rai, North America head of FX Strategy at CIBC Capital Markets, said trading was focused on macro economic data on Monday. “It’s important to highlight that the risks are towards a stronger dollar and primarily, that’s because if you look at the macro economic climate, the fundamentals don’t look good. From a risk-off perspective that should still support the dollar against most currencies,” Rai said. But he said the greenback was consolidating after its recent strength and that more range-bound trading sessions were possible: “It makes sense for some period of consolidation before the next leg higher.” Trading in the dollar may be muted partly because a lot of bad news has already been priced in but also because investors are waiting for events such as the U.S. retail sales data release and a public appearance by Fed Chair Jerome Powell both scheduled for Tuesday, according to Mazen Issa, senior FX strategist at TD Securities.   TUESDAY 17/5/2022 – FOREX-DOLLAR SLIPS AS RISK APPETITE RETURNS The dollar fell for a third straight day on Tuesday, pulling back from a two-decade high against a basket of major peers, as an uptick in investors’ appetite for riskier bets diminished the U.S. currency’s appeal. Upbeat earnings views from Home Depot HD.N and United Airlines UAL.O along with optimism around the easing of China’s crackdown on tech and COVID-19, helped to lift risk sentiment. The U.S. Dollar Currency Index =USD, which tracks the greenback against six major currencies, was down 0.7% at 103.41, its lowest since May 6. The index hit a two-decade high last week supported by a hawkish Federal Reserve and worries over the global economic fallout from the Russia-Ukraine conflict. “The mood in markets has improved dramatically relative to last week with most asset classes bouncing and retracing the moves seen last week,” Brad Bechtel, global head of FX at Jefferies, said in a note to clients. “The result is a rally in equities and sell-off in fixed income with nearly every currency in the world rallying against the USD,” Bechtel said. The dollar remained subdued after data showed U.S. retail sales increased solidly in April as consumers bought motor vehicles amid an improvement in supply and frequented restaurants, showing no signs of demand letting up despite high inflation.   WEDNESDAY 18/5/2022 – POUND FALLS AS UK INFLATION HITS 40-YEAR HIGH Britain’s pound fell against the dollar on Wednesday, pulling away from almost two-week highs after data showing British inflation rising to a 40-year record raised concerns about a sharp economic slowdown given the pain inflicted on consumers. At 1505 GMT, sterling was down 0.7% at $1.24225, having fallen as much as 1% in morning trading. It had also overnight, before the data, briefly touched its highest level in almost two weeks at around $1.25. The drop reverses most of the gains made on Tuesday when strong labour market data had boosted expectations that the Bank of England would have to further increase interest rates. But the latest inflation numbers fuelled fears that the threat of recession may temper how far the central bank can go, having delivered four rate hikes since December. “Yesterday it looked like with wage growth rising and unemployment so low it meant that the bank had more room for manoeuvre,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “Now the eye wateringly high costs for consumers is going to lead to dropping consumer spending power which will have a deep impact on output in the UK economy.”   THURSDAY 19/5/2022 – STERLING AT TWO-WEEK HIGH, WINS RESPITE FROM GROWTH FEARS FOR NOW Sterling climbed to a two-week high against a weaker dollar on Thursday, winning a respite for now from the soaring inflation and murky growth outlook that has weighed on sentiment towards the British currency. In another volatile day of trading, sterling touched its highest level since May 5 at $1.25130, and was last up 1.1% . Having fallen sharply on Wednesday, the pound bounced back – a move analysts attributed to a broadly-weak dollar. It had hit the $1.25 level earlier this week before tumbling on Wednesday after data showed UK inflation rising to a 40-year record high and growing concerns this would slow growth sharply. “The key debate we’re having, and the Bank of England is having, is to what extent should they be responding to the pick-up in inflation and to what extent the rise in inflation is putting downward pressure on future growth, so limiting the need to tighten policy,” said RBC Capital Markets chief currency strategist Adam Cole.   FRIDAY 20/5/2022 – FOREX-DOLLAR SET FOR FIRST LOSING WEEK IN SEVEN AMID U.S. YIELD RETREAT The U.S. dollar was headed for its worst week since early February against major peers on Friday, weighed down by a retreat in Treasury yields and fatigue after the currency’s breathless 10%, 14-week surge. The dollar index, which measures it against six major rivals, tried to claw back some ground into the weekend, edging up 0.05% to 102.96, but remained 1.42% lower for the week, on track to snap a six-week winning run. Last Friday, it had soared to the highest since January 2003 at 105.01. Even with global stocks sliding this week amid risks to growth from aggressive monetary tightening – led by the Federal Reserve – and China’s strict lockdowns to quash a COVID-19 outbreak, the dollar’s appeal as a haven was eclipsed overnight by a decline in U.S. yields as investors rushed for the safety of Treasury bonds. The benchmark 10-year Treasury yield sank to a more than three-week low of 2.772% on Thursday, from a 3 1/2-year high of over 3.2% earlier this month. “The dollar was ripe for a pullback,” Edward Moya, senior analyst with OANDA, wrote in a note to clients. “Across the board weakness might continue a while longer.” Other safe-haven currencies continued to rally overnight, as a key index of global equities headed for a seventh weekly decline, its longest ever.