Post date: 16/05/2022 12:36

Wobbly stock markets trigger rush to safe-havens

Another week of risk asset sell-offs had a predictable effect on currency markets. The Japanese yen topped the week’s performance charts, followed by the US dollar. European currency stalled again, and commodity currencies like the Norwegian krone and the antipodean dollars fell sharply. Emerging market currencies fell against the US dollar, although they continue to more than hold their own against the euro, in a sign that rising commodity prices are still a driving factor in currency exchanges.

The key concern driving markets is the extent to which central banks can bring inflation back in line with targets without serious damage to growth prospects. High-frequency data like US retail sales on Tuesday will take on added importance. Nevertheless, it will be a data light week and therefore communications from central bank officials will be in the spotlight. In addition to a slate of ECB speakers, watch out for the publication of the minutes from the ECB April minutes. Meanwhile, the UK inflation print on Wednesday will be key for the pound.


First-quarter GDP data last week was softer-than-expected, though some details of the number (strong investment, weak public and private consumption) were more positive at the margin. This week, inflation data should see the headline number vault to yet another multi-decade high, probably above 9%, and also strong gains on the core index, expected to print above 6%. Sterling appears to have stabilised recently, at least against other European currencies. However, it is hard to see any significant recovery against the US dollar until the Bank of England shifts its rhetoric towards more aggressive tightening. This week’s line-up of no fewer than six MPC speakers provides a chance for that to happen, though it may be still early.


In the absence of major data, traders last week fret over issues like natural gas supplies and their effect on industrial production. Aside from that, sentiment data was not good but we note that the more informative PMIs continue to hold up well in growth territory. It is hard to see high risks of recession with the composite index well above 55 (50 indicates flat performance). The hawkish rhetorical shift in the ECB has not yet helped the common currency, but we think it is a matter of time before it does. With a slate of speakers and the April meeting minutes on tap this week, we may be looking at an opportunity for a countertrend euro rally.


Second-tier economic data out of the US last week did not significantly change the picture of an economy at full employment, struggling with supply side constraints but still growing. Manufacturing and retail sales data out this week will provide the latest read on the health of the US economy, but they are unlikely to move the needle much. Currency trader focus will remain on the gyrations in the bond and equity markets. We think the flight to safety knee jerk move looks overdone and a stabilisation in stock markets could be enough for the US dollar to give up some of its recent gains.