Foreign exchange trading reminder: the attraction of risk aversion helped the US dollar rise for five consecutive weeks, and the sharp fall in oil prices dragged down commodity currencies

On Tuesday (May 10), the US dollar index is now at 103.74. On Monday, the US dollar index hit a 20-year high to 104.1921, partly due to concerns about the Fed's ability to fight high inflation, triggering risk aversion and boosting the US dollar's risk aversion appeal.

The US dollar has risen for five consecutive weeks and US Treasury yields have climbed. Neelkashkari, chairman of the Federal Reserve Bank of Minneapolis, said on Monday that the easing of supply chain problems might not help the Fed as much as it hoped when it was trying to reduce inflation to its target of 2%.

Bostick, chairman of the Federal Reserve Bank of Atlanta, said on Monday that he expected that the Federal Reserve would need to raise interest rates by 50 basis points twice or three times to deal with inflation, but there would be no larger action.

The continued conflict between Russia and Ukraine and concerns about the spread of COVID-19 also contributed to the tone of risk aversion. Edwardmoya, a senior market analyst at OANDA, said,

"At present, there are three major factors that will continue to provide a solid foundation for the dollar. There is a view that you will not see any major risk factors resolved, and it will definitely not be this week, which may make ending the dominance of the dollar more complicated."

According to the fedwatch tool of CME, the market fully digested the expectation that the Federal Reserve would raise interest rates by at least 50 basis points at the interest rate meeting in June.

The Aussie dollar fell to its lowest level since July 2020 due to lower US stock markets, lower oil prices and cross exchange selling.

The Australian dollar fell to 0.6942 against the US dollar in the morning, the lowest level since July 16, 2020, as the stop loss was triggered and the implied volatility rose;

The euro also hit an intraday high against the Australian dollar, rising 1.6% in the continued short covering;

The US dollar rose 1.0% against the Canadian dollar, standing at the psychological level of 1.30, and the volatility rose. Traders said that breaking this level may indicate that the dollar will continue to rise

Tuesday outlook

Summary of institutional views

Bank of America strategist: strong US corporate performance cannot hide signs of economic slowdown

Bank of America strategists said that despite the good performance of U.S. companies, the signs of economic slowdown were obvious, because leading indicators fell sharply and profit margin expectations cooled.

The reference to "weak demand" jumped to the highest level since the second quarter of 2020. Bank of America's guidance rate, earnings correction rate and corporate confidence index all fell to the lowest level since the second quarter of 2020, intensifying concerns about the economic recession.

Even in the absence of economic recession, the profit growth in 2023 is also at risk, which is expected to be 8% lower than the consensus expectation.

The performance in the first quarter was still robust, 6% higher than the consensus expectation, and all 11 industries were higher than the expectation.

Goldman Sachs: the prospect of the U.S. market is not particularly bright

Davidkostin, a strategist at Goldman Sachs, believes that even if the United States has avoided a full-scale recession, the prospects for the U.S. market are not particularly bright. Kostin said that for the economy and market prices, the best situation may be that returns continue to be limited.

Even in our basic situation and non recession situation, the risk around valuation tends to be downward.

The S & P 500 index fell for the fifth consecutive week, the longest decline since June 2011. On Monday, U.S. stock index futures suggested that the decline might continue.

Since this year, risk appetite and valuation have been dragged down by record inflation data, economic slowdown and the aggressive tightening measures taken by the Federal Reserve to curb soaring inflation. Over the same period, the benchmark stock index has fallen by more than 13%.

Kostin said that before the path of inflation fall is clear, the volatility of the U.S. market will still be large. Kostin added that the tightening of financial conditions and poor market liquidity make it difficult for the market to have a short-term rebound of the scale at the end of March.

Goldman Sachs believes that the only good news for investors is that after the recent decline, most of the bad news may now be reflected in the market.

Damo warns that the current macroeconomic era is the most difficult to predict in decades

Concerns about the global economic recession continue to rise. In the past three months, Morgan Stanley lowered its global growth forecast by 170 basis points, while inflationary pressure is rising.

The bank's global chief economist warned that we are living in the most chaotic and unpredictable macroeconomic era in decades. The factors that led to the global economy going into recession are obvious.

Even if there is no basic forecast scenario of recession, there will be further sharp selling in the U.S. stock market.

This means that those FMCG companies that have recovered from the epidemic and made excessive profits, especially those aiming at soaring consumer demand, will soon run well.

In addition, rising interest rates and declining economic growth have never been good for company valuations. The benchmark forecast scenario of Motorola is that the United States will avoid recession, but in any case, the market will have to face the possibility of rising recession.

According to the analysis, at present, even if some countries' GDP contracted continuously in the second quarter, strengthening fiscal policy and the decline of the epidemic should drive the economic rebound.

The European embargo on Russian oil is not an established fact. Only when all energy imports from Russia, including natural gas, are suddenly cut off, will Europe enter recession. The Fed is exploring monetary policy to control inflation by slowing the economy, but it is willing to change its strategy once it "takes too much medicine".