Good morning. The dollar is holding near a 13-month high and Treasury yields are edging upward as equity futures point to a modest advance at the open, with the Nasdaq set to recover some ground after falling more than 4% last week amid jitters over artificial intelligence valuations. Traders are bracing for turbulence as quarter-end flows collide with a series of key labour market and economic activity releases against a thin liquidity backdrop in a holiday-shortened week, with Canadian exchanges closed on Wednesday and US markets shut on Friday.
Crude prices are easing after the United States and Iran reportedly* agreed to “stand down” following another round of hostilities over the weekend. Brent is trading at $73 a barrel, up from last week’s lows, but down 35% since May 19**—a decline that is easing inflation pressures across the global economy, leading traders to pare expectations for monetary tightening from most central banks, and weighing on most major currencies against the greenback. The euro is flirting with the 1.14 threshold after reaching a 13-month low against the dollar last week, sterling is almost unchanged ahead of a speech from presumptive prime minister Andy Burnham, and the Canadian dollar remains on the defensive ahead of tomorrow’s April gross domestic product report, which is expected to show a modest firming in activity levels.
Speculators have not been this bullish on the dollar since the ‘Trump bump’ surrounding the November 2024 election, as rising inflation, a surprisingly hawkish debut from Federal Reserve chair Kevin Warsh, and the artificial intelligence-driven boom in US equity markets combine to pull capital into American assets. Although last week’s personal consumption expenditures data avoided a widely-feared overheat in headline price growth, the core measure—stripping out food and energy—remained worryingly elevated at 3.4% year-on-year, marking its largest gain since October 2023, and signalling intense supply-side pressures that could outlast the effects of high oil prices. The Fed’s June projections reflected that concern: nine of 19 officials now anticipate at least one rate hike by year-end, and markets are pricing in 32 basis points of tightening—equivalent to 1.3 moves—over the same time frame.
But peaks in speculative positioning are a classic sign of overcrowding, and this week’s dense slate of data releases could bring a course correction. Tomorrow brings a Conference Board consumer confidence update alongside the latest job-openings report, Wednesday’s ADP employment survey and ISM manufacturing index could offer insight into activity levels across the economy, and Thursday’s non-farm payrolls report will clarify whether recent signs of an upturn in hiring are being sustained. Kevin Warsh will appear at the European Central Bank’s annual gathering in Sintra, but is unlikely to offer any new forward guidance—leaving market participants to draw their own conclusions from the data. We don’t expect any, but signs of softening in US labour markets, growth or inflation could see punters revising their views, redefining the dollar’s trajectory for the summer.
*Note the timing of this article—just ahead of the Sunday open for futures trading**. We should all be relieved the administration hasn’t discovered the FX options cut (the exercise cut-off or expiry) that lands at 10:00 am each day.
**When President Trump warned Iran would “no longer exist” and then later announced he was “holding off” on an attack.
***As they say in poker*, “If you’ve been in the game 30 minutes and don’t know who the sucker is, you’re the sucker.”
****And in Warren Buffett’s letters, and in the criminally-underrated movie ‘Rounders’.