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The US dollar surges as global equity markets sink (Daily analysis 10.05.2022)

10 May 2022 9:11|Bartosz Sawicki

The downward spiral on global equity markets is well under way. It is rooted in fear of the pace of policy tightening imposed by the Federal Reserve and fears of a subsequent global economic slowdown. These are the conditions under which investors are turning to the dollar, while currencies of the emerging economies basket and risky representatives of the G-10 are being bypassed by capital.

Spiral of sell-off on stock exchanges and records of the dollar strength are the effect of the Fed policy; source: Conotoxia

Dollar: the US dollar index trades at the highest levels in over 20 years

Since the beginning of the quarter, the mood on Wall Street and European trading floors has been subdued and very chimerical. The technology sector, which is sensitive to monetary policy and the situation on the sovereign bond markets, is in particular trouble. The Nasdaq index has already plunged by almost 20% since the end of March. The situation on Chinese stock markets looks awful, which is also a result of the maintenance of draconian epidemic restrictions. Not only are they hitting the growth of the largest developing economy, but they will also lead to further tensions in supply chains, driving up inflation around the world. Bitcoin's plummeting price reflects the weakening investment sentiment and fears of evaporating excess liquidity, pumping up valuations of many asset classes. The main cryptocurrency has already traded around 50% below historic highs.

The environment of heightened risk aversion resulting from the Fed's intentions obviously favours the dollar. It is gaining between 4 and 9% against the main currencies this quarter. The sharply and painfully overvalued euro ( the EUR/USD is below 1.06) is among the representatives of the basket of developed economies most resistant to the rally of the US currency. Yesterday, the dollar index reached its highest level in twenty years, but the upward momentum seems to be dying down. There are further signals from the Fed that rate moves of more than 50 basis points are unnecessary. Tomorrow's inflation reading will be an important input in assessing the next steps. A stronger rebound in EUR/USD will require clear evidence that the European economy is not in deep trouble. One of them may be the reading of the ZEW index in the morning, but a whole series of data may be necessary to improve the perception of the common currency.

Czech koruna: inflation records and central bank reshuffle

Like EUR/PLN cannot break away from 4.70, the EUR/CZK remains around 25.00 after last week's surge. The Czech koruna initially performed well after a stronger-than-expected rate hike (from 5.0 to 5.75%), but in the finish, it was brutally discounted after rumours about the filling of the post of central bank chief and in an unfavourable environment, it is unable to regain its resonance. The Czech currency has lost around 1.5% against the zloty as well as the euro this month. Investors were alarmed to hear that Ales Michl was to succeed Governor Jire Rusnoek, whose term ends in June.

There are two reasons behind this. Firstly: the CNB has a reputation as one of the most hawkish central banks in the world. Meanwhile, the choice of Michl could bury this currency-friendly reputation: the policymaker has been resisting rate rises even in recent months amid vital fears that inflation is out of control. Moreover, data released this morning show that consumer price growth accelerated much more strongly in April than forecast, from 12.7 to as much as 14.2% year-on-year. Investors may be concerned that a change at the head of the bank will also trigger another reshuffle resulting in a drift of the centre of gravity towards a softer policy. A second reason for concern about Michl's candidacy is that former prime minister Anre Babis, a business tycoon, suggested it to President Milos Zeman. This is a blow to the CNB's spotless reputation.

10 May 2022 9:11|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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Currency exchange rates react to the Fed, EUR/PLN near 4.65, USD plunges (Daily analysis 5.05.2022)

28 Apr 2022 8:17

Exchange rates in the shadow of the dollar's power, EUR/USD breaches pandemic lows, GBP and NOK heavily battered (Daily analysis 28.04.2022)

25 Apr 2022 8:45

Currency exchange rates after the French elections: the euro continues to sink, the dollar attracts, the zloty is at risk (Daily analysis 25.04.2022)

19 Apr 2022 9:00

Exchange rates under the dollar's influence, yen on the ropes, euro sinks (Daily analysis 19.04.2022)

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