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Dollar weakens as markets brace for credit contraction

The dollar is weaker against all of its major counterparts – except the yen – this morning as investors await data that should confirm a sharp contraction in US credit growth after the failure of Silicon Valley Bank in early March. Two- and ten-year yields are holding steady, futures are pointing to a mixed open for North American equities, and commodity prices are creeping higher.

The yen reversed a brief post-Golden Week rally in the overnight session after a record of the Bank of Japan’s latest meeting showed officials remaining committed to “large-scale easing”, with supply chain constraints easing, commodity prices coming down, and the global economy believed likely to enter a slowdown. 

With crude prices stabilizing after a big rally on Friday, the Canadian dollar is holding near relatively elevated levels. Market participants are on tenterhooks ahead of market outlook updates from the Energy Information Administration and OPEC later in the week – each of which could prompt jawboning efforts from major exporters.

This afternoon’s Senior Loan Officer Opinion Survey will almost certainly show a broad-based tightening in lending standards, indicating that credit conditions were undergoing a rapid deterioration in the first week of April. This is likely to have a negative impact on overall economic growth, although we would note that loan volumes appear to have rebounded in the succeeding weeks, suggesting that the damage isn’t quite as bad as markets seem to fear.

But markets may also be having second thoughts about Friday‘s jobs report. Yields and the dollar climbed in the minutes after the Bureau of Labour Statistics reported that employers added 253,000 jobs in April, well above the consensus forecast at 180,000, and enough to allay fears of an imminent recession. But revisions subtracted 149,000 jobs from the prior two months, bringing the 3-month average to 222,000 – well below the pace set at the same time last year – and average weekly hours fell toward pre-pandemic averages, suggesting that a slowdown is likely in coming months. In comments at Berkshire Hathaway’s annual meeting, Warren Buffett said “the majority of our businesses will report lower earnings this year than last year,” as an “incredible period” of economic growth comes to an end.

Wednesday’s US data is forecast to show the headline consumer price index rising 0.4 percent in April, with growth in the core measure slowing to 5.5 percent year over year, down incrementally from 5.6 percent in March. This is unlikely to placate central bankers seeking evidence of a sustained decline in inflation pressures, but another release – May’s – will land before the Federal Reserve’s next meeting, lowering the likelihood of a violent reaction in markets. Futures markets are currently assigning near-90-percent odds to a pause at the June meeting, and a 50-percent probability of a cut in September.

The Bank of England is almost universally expected to deliver another quarter-point rate hike on Thursday, but market participants will focus on what the Monetary Policy Committee vote split says about the likelihood of another move in the succeeding months. With inflation running at a higher rate in the United Kingdom than any other major economy, wage growth continuing apace, and activity levels beating expectations, policymakers will almost certainly maintain a hawkish bias in the accompanying statement and post-decision press conference – but if other officials join Silvana Tenreyro and Swati Dhingra in voting against the move, the pound could come under pressure as the case for additional hikes becomes less compelling.

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