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Dollar sensitive to weak data, not higher oil prices (Daily analysis 4.04.2023)

4 Apr 2023 9:43|Bartosz Sawicki

The dollar opened the quarter with a bounce but promptly lost momentum. The EUR/USD pair is back above 1.09. The monetary policy stance will be more important than the USD's positive impact of more expensive energy on the balance of payments trends. In this arena, the euro outclasses the US currency. At the start of the month, the strongest G-10 currency is the NOK. The Norwegian krone is making up for past months' losses supported by an upward trend in the Brent crude oil price.

US dollar exchange rate falls after weak data pushing oil prices rise in the background; source: Conotoxia

US dollar: higher oil price won't stop the EUR/USD pair rising

The dollar began the quarter with a rally, which was quickly reversed and then turned into a weakening of the US currency. It is likely that the familiar mechanisms of last year were initially at work when sharply rising energy prices improved the terms of trade of the net oil-exporting United States. The opposite is true for the energy-import-dependent eurozone countries. In any case, the collapse in gas prices and the fall in oil prices have played an important role in the improvement in the balance of payments, which has recently been and is expected to continue to be favourable for the euro and lift the EUR/USD exchange rate.

The OPEC+ production cut will tighten the crude market and could lift the Brent barrel price towards 100 USD. This will support currencies such as the Norwegian krone and the Canadian dollar. However, we believe that it does not have the potential to become a leading force in the quotations of the main currencies, allowing the USD to regain its shine and the euro-dollar exchange rate to break out of its upward trend. Economic developments following the emergence of tensions in the banking sector and the related attitude of central banks will be key to the strength of the main currencies this quarter.

US dollar: Monetary policy supports the euro

We expect the ECB to maintain its tight stance. While persistent core inflation is the main concern, the inevitable rise in fuel prices will certainly not support an easing stance. On Monday, Robert Holzmann, one of the more hawkish members of the Governing Council, suggested that a return to sharp 50bp hikes is possible if the banking sector does not plunge into crisis. At the same time, the Fed is on the finishing stretch of hikes. The valuation assuming that there could be rate cuts in the US later this year (to a ceiling of around 50 basis points below the current range of 4.75-5.00%) is supported by the latest data.

The ISM index, the main barometer of industrial sentiment, disappointed at the start of the week. The index fell for the fifth consecutive month, from 47.7 to 46.3, below the 50 level separating growth from the sector's contraction. Moreover, the components reflecting new orders and employment performed poorly, while the reading also pointed to easing price pressures. Of course, Friday's employment report will be the most important of the week. Today we will learn about the number of job openings in February, while tomorrow, we will see the ADP estimate of the change in employment and the ISM services index. We expect investors to be more sensitive to USD-negative signals from the economy, given the negative impact of the regional banks' problems on lending and may be looking through their fingers for good data, especially for the periods before the collapse of Silicon Valley Bank.

4 Apr 2023 9:43|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

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