20.05.2022: Fed and other central banks behind curve on inflation; USDX, USD/JPY, AUD/USD
Wall Street is now gripped by fears and uncertainty. These two factors are strongly affecting stocks’ movements. However, rising inflation is also weighing on household incomes. Consumers tend to save money. So, the purchasing power is falling. Inflation and supply chain disruptions are likely to significantly slow down a consumer-driven economy. These problems have already hurt the largest US retailers. After Walmart and Target had cut their profit outlooks for the year, Ross Stores and Kohl's, the largest US department store chain, did the same. Shares of top retailers fell considerably after disappointing earnings reports. Ross Stores stock plummeted by 25%, dragging the S&P 500 index down. The index slid by 19% from the highest closing level of early 2022, namely January 3. As a reminder, a 20% decline from a recent peak is considered by analysts a bearish signal. Economists are also voicing concerns about the inevitability of a recession in the US in the years to come. Some of them are sure that it may happen in the second half of 2022. However, in the Asian session, futures on US stock indices were still trading in the black.
The US dollar was also up in the Asian session, heading for its worst week since early February 2022. After a 14-week breathless surge and a 10% increase versus its main rivals, the US dollar index seems fatigued and is ready for a retreat. Moreover, its appeal as a safe-haven asset has eclipsed a drop in Treasury yields for a while . Government bonds lifted lower today, pushing the US dollar down. So, it was trading in the price corridor of 102.79–103.11. At the time of making the video, the index rose to the level of 102.92 thanks to a strong upward momentum. Traders are now also worried that the Fed and other central banks have fallen behind the curve in combating super-hot inflation. So, they will need to be even more aggressive in tightening policy. Such a prospect is negative for the economy, which may slide into recession. The US dollar may also weaken due to a decline in business activity in the country.
Unlike the greenback, the yen is highly likely to benefit greatly from a recession not only in the US but also worldwide. The same can be said about other safe-haven currencies, which have shown an overnight rally following a fall in the MSCI's flagship global equity index. The index has been moving down for the seventh week in a row, the longest in its history. As a result, the dollar/yen pair managed to climb to 127.78 for the second time in a row this week. During today's Asian trade, the greenback regained the upper hand. The pair was fluctuating slightly within the range of 127.50–128.21. At the time of writing the article, it was trading at 128.04.
Lockdowns in China also have a significant impact on Asian markets. Recently, there have been some positive shifts in the fight against the virus. However, today, Shanghai reported three new coronavirus cases outside the quarantine zones. This is why the city may prolong the lockdown, abandoning plans to ease restrictions. If so, it may trigger a new spike in prices worldwide. The government has not made any announcements yet. To this end, the Australian dollar edged higher amid hopes that business activity could resume in China.
Despite risk aversion in stock markets, the Aussie grew against the US dollar by 1.4%. Besides, the RBA is expected to raise the key rate soon. In the Asian session, the AUD/USD pair bounced from 0.7000. The Aussie was able to regain momentum. At the time of making the video, the pair approached 0.7067, moving between the resistance level of 0.7071 and the support level of 0.7003.