The release of quarterly earnings in the US continues to paint a better picture for American corporates, with big tech companies beating estimates yesterday. However, concerns about the US banking sector have returned after First Republic’s shares dropped 49% following the larger-than-expected drop in deposits and announced restructuring plans. Ultimately, a risk-off mood has prevailed, despite the overall contagion effect having been significantly more contained than in previous instances in March. In FX, this still translated into a fully-fledged flight to safety with the recovering ground yesterday. The dollar hasn’t really connected with the dovish repricing in Fed rate expectations, with rate cut expectations that have risen steadily since the end of last week. From 55bp of easing priced in by year-end on Friday to 75bp this morning. We suspect that some help to the dollar momentum shown yesterday would need to come from good US data over the remainder of the week. Ahead of the more important GDP and PCE figures tomorrow and Friday, we’ll take a look at durable goods orders and wholesale inventories today.
During this trading session, the CAD's value relative to the USD has remained relatively steady. Short-term spreads between the US and Canada have not fluctuated, and there has been a slight increase in crude oil prices. The CAD has also experienced a decline in value compared to the EUR, causing the EUR/CAD to reach a 1.50 handle for the first time since September 2021. Although the CAD initially outperformed in April, this trend has since diminished. Despite this, the CAD still appears undervalued compared to its fair value estimate, and there is currently limited potential for much more USD upside.
EUR/USD continues to hover around the 1.1000 mark, and we think it can find fresh support above that level if some risk sentiment stabilization offers a chance to reconnect with a favorable rate differential. The eurozone calendar is quite empty and the predominance of news coming from the US on the banking and equity sector leaves EUR/USD even more driven by the dollar.
The pound moved broadly in line with other European currencies yesterday, and we see room for a recovery as the dollar’s momentum may struggle to last. We see room for the GBP/USD to re-test the recent 1.2543 highs by the end of the week in a less unfavourable risk environment, and thanks to the pre-Bank of England meeting hawkish narrative which is still offering decent support to the pound.
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