The defensive dollar is back

The main theme for markets to trade this week has been a continued divergence of economic surprises. US data once again exceeded expectations, specifically the third reading of Q1 GDP which came in stronger than anticipated, while economic events outside of the US generally underdelivered. The week began with lingering concerns over China’s growth outlook that led the yuan lower once again, before the PBoC began pushing back on market forces. Analysts then turned their attention to Sintra, where prominent policymakers from across the globe met at the ECB’s economic forum. Despite the policy challenges faced by all attending members, markets were left underwhelmed by the lack of guidance delivered. Subsequently, inflation data out of the eurozone showed a renewed uptick in core CPI, a favourable outcome for the hawkish chorus amongst the ECB. But ultimately, the week’s themes resulted in a rebound in the broad dollar, as the higher yielding nature and defensive attributes of the greenback were viewed as attractive within an increasingly complex macro environment. Next week the question will be if this divergence in the economic surprises will continue, with the main measures of this being jobs data out of the US on Friday and growth data out of China on Wednesday, but the RBA, NBP and Canadian jobs will also be in focus for markets.

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Authors: 

Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

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