Foreign exchange trading reminder: U.S. stocks sell off tragically, the dollar ends a three-day losing streak, and stagflation in the United States may be inevitable

In early Asian trading on Thursday (May 19), the U.S. dollar index was at 103.83. The U.S. dollar rose 0.6% on Wednesday, ending a three-day losing streak. Concerns about global economic growth prospects and rising inflation hit market sentiment. , the day before, Fed Chairman Powell made a hawkish speech. Powell pledged on Tuesday that the Fed would raise interest rates to levels needed to contain a surge in inflation, including above neutral, which he said had threatened the economic fundamentals.



Neutral interest rates are interest rates that neither stimulate nor restrict economic activity. The neutral rate is widely expected to be around 3.5% by mid-2023.

The dollar benefited from demand for safe-haven assets on Wednesday as stocks sold off and U.S. Treasury yields fell. Michael Brown, head of market intelligence at Caxton, said: "Unsurprisingly, Tuesday's rally in risk assets appeared to be short-lived, and was almost completely lost in Wednesday morning's trading. As a result, safe-haven demand for the dollar has re-emerged and there has been a certain It's a 'fleeing to cash' phenomenon where Treasuries haven't gotten much buying despite shaky market sentiment."

"Technically, this will keep the bulls happy, the dollar index has managed to hold above previous support at 103.20, which, combined with a persistently subdued economic backdrop, should keep the dollar firm for the time being," said Caxton's Brown.

Sterling fell more than 1.2% against the dollar on Wednesday after data showed British inflation rose to a 40-year high of 9%.

The Australian dollar, seen as an indicator of risk-on liquidity, fell more than 1.0% as investors took a bearish view of riskier currencies. Data from the Australian Bureau of Statistics on Wednesday showed the seasonally adjusted wage price index (WPI) rose 0.7% in the first quarter from the previous quarter, missing forecasts for a rise of 0.8%, leading investors to cut back on the country by a larger margin. Rate hike bets.

Thursday Forward

Institutional view

JPMorgan: Downgrades U.S. GDP forecast due to falling stock market and other factors

Falling stock prices, rising mortgage rates and a stronger dollar relative to trading partners will weigh on the economic outlook, lowering forecasts for the U.S. economy this year and next. The economic growth forecast for the second half of 2022 was lowered from 3% to 2.4%, the first half of 2023 forecast was lowered from 2.1% to 1.5%, and the second half of 2023 forecast was lowered from 1.4% to 1%. This will lead to a U.S. unemployment rate of 3.5% in the second half of 2023, compared with an earlier forecast of 3.2%. The Fed is stepping up its efforts to implement the required tightening measures in financial conditions, giving us some confidence that GDP growth will slip below potential in the coming quarters.

Fund manager Gramercy: U.S. stagflation is inevitable

Mohamed El-Erian, chairman of fund management firm Gramercy Fund Management, said that while the U.S. may be able to avoid a recession, stagflation is inevitable. We've seen growth decline and we're going to see inflation stay high. The Fed is now finally starting to catch up with reality. They still have to digest a "significant slowdown in growth," which means the market will continue to adjust.

Markets firm expectations for a second rate hike by the Bank of Canada at its next meeting on June 1

Most economists believe the Bank of Canada will raise its overnight rate to 2 per cent by the summer. Investors see Canada's benchmark interest rate rising above 3 per cent over the next 12 months in one of the most aggressive tightening cycles since the late 2000s.

Goldman Sachs: U.S. at risk of recession

Goldman Sachs CEO David Solomon said the bank's clients were bracing for slower economic growth and falling asset prices, all as "extremely punitive" inflation weighed on the economy.

Although he said in a telephone interview that "there is a possibility of a recession," he was not overly concerned about the risk, citing estimates from economists such as his firm Jan Hatzius, who said the risk of a recession in the next 12 to 24 months is at least 20 percent. 30%. He is watching closely to see if credit spreads start to widen more significantly.

A few months before his remarks, Goldman Sachs John Waldron told a large investment client that the Fed was not moving fast enough to fight inflation. This week, former Goldman Sachs CEO Lloyd Blankfein expressed similar unease about soaring prices.

"We have to get rid of inflation, which is extremely punitive, especially for those who live on weekly, dead wages," Solomon said by phone Tuesday. "It's a huge tax on this class of society. . I think it's very, very important to control it."

He added that Goldman's clients are recognizing that economic conditions are tightening, and the process remains fairly orderly for now. While the drop in share prices is predictable, it would be "worrisome" if the turmoil spilled over to credit spreads. "We're seeing a tightening of monetary conditions, and given that we're moving into a more restrictive monetary policy environment, it's not surprising what happened to asset prices," he said.

More than 60% of Japanese companies believe the Bank of Japan should stop massive monetary stimulus by the end of this fiscal year

More than 60% of Japanese companies want the Bank of Japan to end its massive monetary easing in fiscal 2022 (ending March 2023), a survey showed, as pain comes from a weaker yen, with about a quarter calling for it The central bank is taking action now. Less than a year ago, Japanese companies enthusiastically supported the Bank of Japan's policy, but this year the yen has slipped rapidly to a 20-year low, pushing up fuel and raw material import prices, not only driving up corporate costs but also hurting household spending. blow. Twenty-four percent of respondents think the Bank of Japan should stop its massive monetary stimulus now, and 23% think it should stop by September.