The Morning Update

Wednesday May 1st, 2024

Written by:
Paul Harrison

The USD strengthens, oil prices weaken, while equity markets and US treasuries are mixed heading into today's Fed meeting. The USD extends its best daily gain over two weeks as risk sentiment eases ahead of the Fed's interest rate decision today and expectations of higher US rates for longer. US equities saw their worst month since September, Asian markets were also down, and Japan's Nikkei 225 Index had its worst month since December 2022. With the combination of thinner markets with the May 1st holidays and the prospect of further hawkish rhetoric from the Fed, we expected to see USD strength continue. "If the Fed asserts a high probability of no cuts this year, or even open possibility of another hike, that could deepen the selloff in stocks," said Rodda, a senior market analyst at Elsewhere, oil prices continue to weaken on the prospect of a Hamas/Israel ceasefire. Bitcoin weakened by 4%, while gold and silver prices were steady. Alongside the Fed Interest Rate Decision, investors will also be focused on US ADP Employment change, ISM Manufacturing PMI, Jolts Jobs Opening, and CAD S&P Global Manufacturing PMI to help provide intraday direction to currency markets.

In other news. UK house prices fall unexpectedly for a second consecutive month. Canada's TD Bank takes US$450 million in provision for the US money-laundering probe. Luxury carmaker Aston Martin slumps 12% as losses nearly double. Amazon cost cuts drive operating margin into double digits for the first time. New York police enter Columbia's campus and arrest protesters. Milei scores legislative victories in Argentina's lower house. Citi says traders expect the biggest Fed-Day move in the S&P since 2023. In Israel, Blinken set to push Netanyahu for sustained aid into Gaza. Musk disbands Tesla EV charging team, leaving customers in the dark.

In currency markets. Japan's ruling party considers tax breaks to spur JPY repatriation officials say in another attempt to support its domestic currency. Currency markets are steady ahead of the FOMC meeting but remain vulnerable to increased volatility amid the May Day market holidays. CNY slips 0.1%, while Asian currencies are flat on average vs USD. Trading currencies are mixed, with CHF weakening 0.2%, JPY & NOK down 0.1%, NZD & IDR flat, SEK, AUD & MXN up 0.1%, and ZAR strengthening 0.2% vs. USD.

In commodity markets. Oil prices weakened by 1.25%, natural gas prices tumbled 2.7%, gold & soybean prices fell 0.4%, silver prices are flat, Copper prices eased by 0.6%, and wheat prices gained 0.6%.

CAD holds steady after suffering its worst monthly loss since October amid a rallying USD, a dovish BoC, and the prospect of interest rate divergence this quarter. Domestically, February's GDP report shows the Canadian economy is losing steam and is reinforcing investor expectations that the Bank of Canada could cut interest rates as soon as June. The focus shifts to today's S&P Global Manufacturing PMI data for April, which is expected to grow to 50.2, a gain from 49.8 in February. Intraday, the Fed Chair's comments will be the loonie's primary driver. The prospect of an interest rate divergence between the Fed & the BoC as early as June is likely to see the loonie weaken towards 1.4000 next.

EURCAD stalls near 1.4700, but the CAD looks vulnerable to weaken towards 1.4850 with falling commodity prices and the prospect that the BoC may be the first major central bank to cut interest rates in June.

EUR remains under pressure heading ahead of a flurry of US data and the Fed's interest rate decision today. With most European markets closed for Labor Day, investors are sidelined as they await the Fed policy announcements to provide the next directional move. The euro is expected to remain under pressure against the USD as the US economy remains resilient while the eurozone continues to struggle. The expectation of an interest rate divergence with the ECB likely cutting rates in the summer, while the US may not cut rates at all in 2024, could see the euro potentially retrace back to parity with the USD.

GBPEUR continues to extend gains, having rallied from 1.1550 to 1.1720 over the last seven days, based on the prospect that the BoE will keep rates on hold for longer than the ECB.

GBP steadies near 1.2500 ahead of the Fed's interest rate announcement today. The pound comes under selling pressure against the USD after hitting its highest levels in nearly three weeks on Monday at 1.2550. The combination of easing global risk sentiment and the increasing expectations that the Fed will keep interest rates on hold beyond 2024 has helped position the USD as the investor's currency of choice. Domestically, Nationwide Housing Prices fell m/m by -0.4%, its second consecutive fall, while the UK Manufacturing PMI beat expectations, growing to 49.1 vs 48.7 previously. Intraday, the US economic data and Fed policy comments will drive the pound's direction.